-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IM0eKLMf7X4ps20PIiDZoftW0Cxhe4NEi8FUUUxgWjZJ4hsJ0KHuyP4M/jT9PWbM pi5aJbGotMfcGibTxzmNkw== 0001019687-09-003182.txt : 20090831 0001019687-09-003182.hdr.sgml : 20090831 20090831163106 ACCESSION NUMBER: 0001019687-09-003182 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20090531 FILED AS OF DATE: 20090831 DATE AS OF CHANGE: 20090831 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BIOMERICA INC CENTRAL INDEX KEY: 0000073290 STANDARD INDUSTRIAL CLASSIFICATION: DENTAL EQUIPMENT & SUPPLIES [3843] IRS NUMBER: 952645573 STATE OF INCORPORATION: DE FISCAL YEAR END: 0531 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-08765 FILM NUMBER: 091046350 BUSINESS ADDRESS: STREET 1: 1533 MONROVIA AVENUE CITY: NEWPORT BEACH STATE: CA ZIP: 92663 BUSINESS PHONE: 9496452111 MAIL ADDRESS: STREET 1: 1533 MONROVIA AVENUE CITY: NEWPORT BEACH STATE: CA ZIP: 92663 FORMER COMPANY: FORMER CONFORMED NAME: NMS PHARMACEUTICALS INC DATE OF NAME CHANGE: 19871130 FORMER COMPANY: FORMER CONFORMED NAME: NUCLEAR MEDICAL SYSTEMS INC DATE OF NAME CHANGE: 19830216 FORMER COMPANY: FORMER CONFORMED NAME: NUCLEAR INSTRUMENTS INC DATE OF NAME CHANGE: 19720508 10-K 1 biomerica_10k-053109.txt FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K [X] ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED MAY 31, 2009 or [ ] Transition Report Under Section 13 or 15(d) of The Securities Exchange Act Of 1934 For The Transition Period From ______ To ______ COMMISSION FILE NUMBER: 0-8765 BIOMERICA, INC. (Exact Name of registrant as specified in its charter) DELAWARE 95-2645573 (State or other jurisdiction of (I.R.S. Employer Incorporation of organization) Identification No.) 1533 MONROVIA AVENUE, NEWPORT BEACH, CA 92663 (Address of principal executive offices) (Zip Code) REGISTRANT'S TELEPHONE NUMBER: (949) 645-2111 Securities registered under Section 12(b) of the Exchange Act: (TITLE OF EACH CLASS) (NAME OF EACH EXCHANGE ON WHICH REGISTERED) --------------------- ------------------------------------------- NONE OTC-BULLETIN BOARD Securities registered pursuant to Section 12(g) of the Act: (TITLE OF EACH CLASS) COMMON STOCK, PAR VALUE $0.08 Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act Yes [_] No [X] Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Securities Act. Yes [X] No [_] Note - Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Exchange Act from their obligations under those Sections. Indicate by check whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Date File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (paragraph 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [_] No [_] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (paragraph 229.405 of this chapter) is not contained herein, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] Indicate by check mark whether the registrant is a large accelerated, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of "large accelerated filer", "accelerated filer", and "smaller reporting company" in Rule 12b-2 of the Exchange Act. Large Accelerated Filer [_] Accelerated Filer [_] Non-Accelerated Filer [_] Smaller Reporting Company [X] Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes [_] No [X] State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was sold, or the average bid and asked price of such common equity, as the last business day of the registrant's most recently completed second fiscal quarter (based upon 5,302,847 shares held by non-affiliates and the closing price of $0.43 per share for Common Stock in the over-the-counter market as of November 30, 2008): $2,280,224 Indicate the number of shares outstanding of each of the registrant's common stock, par value $0.08, outstanding as of August 28, 2009: 6,631,039 DOCUMENTS INCORPORATED BY REFERENCE: Part III contains information incorporated by reference to the Company's proxy statement for its 2009 Annual Meeting of Stockholders, which will be filed not later than 120 days after the end of the Company's fiscal year ended May 31, 2009. The Exhibit Index incorporates by reference various documents previously filed with the Securities and Exchange Commission. PART I* ITEM 1. DESCRIPTION OF BUSINESS BUSINESS OVERVIEW THE COMPANY Biomerica, Inc. ("Biomerica", the "Company", "we" or "our") was incorporated in Delaware in September 1971 as Nuclear Medical Systems, Inc. The Company develops, manufactures, and markets medical diagnostic products designed for the early detection and monitoring of chronic diseases and medical conditions. Our medical diagnostic products are sold worldwide in two markets: 1) clinical laboratories and 2) point of care (physicians' offices and over-the-counter drugstores). Our diagnostic test kits are used to analyze blood or urine from patients in the diagnosis of various diseases and other medical complications, or to measure the level of specific hormones, antibodies, antigens or other substances, which may exist in the human body in extremely small concentrations. Technological advances in medical diagnostics have made it possible to perform diagnostic tests within the home and the physician's office (the point of care), rather than in the clinical laboratory. One of our objectives has been to develop and market rapid diagnostic tests that are accurate, employ easily obtained specimens, and are simple to perform without instrumentation. Our over-the-counter and professional rapid diagnostic products help to manage existing medical conditions and may save lives through early detection and prompt diagnosis. Until recently, tests of this kind required the services of medical technologists and sophisticated instrumentation. Frequently, results were not available until at least the following day. We believe that rapid point of care tests are as accurate as laboratory tests when used properly and they require no instrumentation, give reliable results in minutes and can be performed with confidence in the home or the physician's office. Our clinical laboratory diagnostic products include tests for bone and anemia conditions, gastrointestinal diseases, food intolerance, diabetes and others. These diagnostic test kits utilize enzyme immunoassay technology. Some of these products have not yet been submitted for clearance by the FDA for diagnostic use, but can be sold in various foreign countries. -1- A significant part of Biomerica's manufacturing and assembly operations are located in Mexicali, Mexico, in order to reduce the cost of manufacturing and compete more effectively worldwide. Biomerica maintains its headquarters in Newport Beach, California where it houses administration, research and development, sales and marketing, and customer services. Biomerica has undergone no material change in the mode of conducting its business other than as described above and it did not dispose of any material amount of its assets in fiscal 2009 and 2008 except for its ownership in Lancer Orthodontics in fiscal 2008. PRODUCTION Most of our diagnostic test kits are processed and assembled at our facilities in Newport Beach, California and in Mexicali, Mexico. During fiscal 2003, the diagnostics division established a manufacturing facility in Mexicali, Mexico. We moved a significant portion of our diagnostic production (primarily packaging and assembly) to that facility. We sublease facilities from and subcontract with Lancer Orthodontics (a former subsidiary) to provide labor and other services. Production of diagnostic tests can involve formulating component antibodies and antigens in specified concentrations, attaching a tracer to the antigen, filling components into vials, packaging and labeling. We continually engage in quality control procedures to assure the consistency and quality of our products and to comply with applicable FDA regulations. In June 2008 the Company incorporated in Mexico under the name of Biomerica de Mexico for the purpose of establishing our own mequiladora operation in Mexico at some time in the future. All manufacturing production is regulated by the FDA Good Manufacturing Practices for medical devices. We have an internal quality control department that monitors and evaluates product quality and output. We also have an internal Quality Systems department which ensures that our operating procedures are in compliance with current FDA, CE Mark and ISO regulations. We either produce our own antibodies and antigens or purchase these materials from qualified vendors. We have alternate, approved sources for raw materials procurement and we do not believe that material availability in the foreseeable future will be a problem. RESEARCH AND DEVELOPMENT Biomerica is engaged in research and development to broaden its diagnostic product line in specific areas. Research and development expenses include the costs of materials, supplies, personnel, facilities and equipment as well as outside contract services. Consolidated research and development expenses incurred by Biomerica for the years ended May 31, 2009 and 2008 aggregated $278,308 and $259,085, respectively. MARKETS AND METHODS OF DISTRIBUTION Biomerica has approximately 450 current customers for its diagnostic business, of which approximately 100 are distributors and the balance are hospital and clinical laboratories, medical research institutions, medical schools, pharmaceutical companies, chain drugstores, wholesalers and physicians' offices. We rely on unaffiliated distributors, advertising in medical and trade journals, exhibitions at trade conventions, direct mailings and an internal sales staff to market our diagnostic products. We target two main markets: (a) clinical laboratories and (b) point of care testing (physicians' offices and over-the-counter drug stores). Marketing plans are utilized in targeting each of the two markets. For the year ended May 31, 2009 the Company had two customers which accounted for 26% of consolidated sales and during fiscal 2008 the Company had two customers which accounted for 29% of consolidated sales. BACKLOG At May 31, 2009 and 2008 Biomerica had a backlog of approximately $97,000 and $346,000 respectively. RAW MATERIALS The principal raw materials utilized by Biomerica consist of various chemicals, serums, reagents and packaging supplies. Almost all of our raw materials are available from several sources, and we are not dependent upon any single source of supply or a few suppliers. For the years ended May 31, 2009 and 2008, no company accounted for more than 10% of the consolidated purchases of raw materials. We maintain inventories of antibodies and antigens as components for our diagnostic test kits. Some sales orders are processed on the day received while others are processed at a later date depending on the quantity and type of order. -2- COMPETITION Immunodiagnostic products are currently produced by more than 100 companies. Biomerica is not a significant factor in the overall market. Our competitors vary greatly in size. Many are divisions or subsidiaries of well-established medical and pharmaceutical concerns which are much larger than Biomerica and expend substantially greater amounts than we do for research and development, manufacturing, advertising and marketing. The primary competitive factors affecting the sale of diagnostic products are uniqueness, quality of product performance, price, service and marketing. We believe we compete primarily on the basis of the uniqueness of our products, the quality of our products, the speed of our test results, our patent position, our favorable pricing and our prompt shipment of orders. We offer a broader range of products than many competitors of comparable size, but to date have had limited marketing capability. We are working on expanding this capability through marketing and strategic cooperation with larger companies and distributors. GOVERNMENT REGULATION OF OUR DIAGNOSTIC BUSINESS As part of our diagnostic business, we sell products that are legally defined to be medical devices. As a result, we are considered to be a medical device manufacturer, and as such are subject to the regulations of numerous governmental entities. These agencies include the Food and Drug Administration the "FDA"), the United States Drug Enforcement Agency (the "DEA"), Environmental Protection Agency, Federal Trade Commission, Occupational Safety and Health Administration, U.S. Department of Agriculture ("USDA"), and Consumer Product Safety Commission. These activities are also regulated by various agencies of the states and localities in which our products are sold. These regulations govern the introduction of new medical devices, the observance of certain standards with respect to the manufacture and labeling of medical devices, the maintenance of certain records and the reporting of potential product problems and other matters. The Food, Drug & Cosmetic Act of 1938 (the "FDCA") regulates medical devices in the United States by classifying them into one of three classes based on the extent of regulation believed necessary to ensure safety and effectiveness. Class I devices are those devices for which safety and effectiveness can reasonably be ensured through general controls, such as device listing, adequate labeling, pre-market notification and adherence to the Quality System Regulation ("QSR") as well as Medical Device Reporting (MDR), labeling and other regulatory requirements. Some Class I medical devices are exempt from the requirement of Pre-Market Approval ("PMA") or clearance. Class II devices are those devices for which safety and effectiveness can reasonably be ensured through the use of special controls, such as performance standards, post-market surveillance and patient registries, as well as adherence to the general controls provisions applicable to Class I devices. Class III devices are devices that generally must receive pre-market approval by the FDA pursuant to a pre-market approval application to ensure their safety and effectiveness. Generally, Class III devices are limited to life-sustaining, life-supporting or implantable devices. However, this classification can also apply to novel technology or new intended uses or applications for existing devices. The Company's products are primarily either Class I or Class II medical devices. The following is a breakdown of the Biomerica products by class: Class I - Fortel(TM) Ovulation test, EZ-LH(TM) Rapid Ovulation test Class II - GAP(tm) IgG H. Pylori ELISA kit, GAP (TM)IgM H. Pylori ELISA kit, Anti-thyroglobulin ELISA kit, anti-TPO ELISA kit, PTH (intact) ELISA kit, Calcitonin ELISA kit, Erythropoietin ELISA kit, ACTH ELISA kit, Isletest(tm) GAD ELISA kit, IAA ELISA kit, GAP(tm) IgA H. Pylori ELISA kit, C-Peptide ELISA kit, Myoglobin ELISA, Troponin I ELISA, HS-CRP ELISA, Allerquant (tm) Food Intolerance Kits, Allerquant( tm) Food Additive Intolerance Kit, Gliadin IgG and IgA kits, Transglutaminase IgA kit, Fortel Ultra Midstream (OTC and plastic stick), EZ-HCG(tm) Rapid Pregnancy test (professional and dipstick), EZ Detect(tm) Fecal Occult Blood test (Physician's dispenser pack and OTC), Aware(tm) Breast Self-Examination, drugs of abuse rapid tests, EZ-HP Professional, EZ-HP OTC, Fortel Microalbumin test, Fortel Cat Allergy Test. Class III - Isletest(tm) ICA ELISA kit, EZ PSA (Professional and OTC). If the FDA finds that the device is not substantially equivalent to a predicate device, the device may be deemed a Class III device, and a manufacturer or seller is required to file a PMA application. Approval of a PMA application for a new medical device usually requires, among other things, extensive clinical data on the safety and effectiveness of the device. PMA applications may take years to be approved after they are filed, but approval is required before the product can be sold for general use in the U.S. In addition to requiring clearance or approval for new medical devices, FDA rules also require a new 510(k) filing and review period, prior to marketing a changed or modified version of an existing legally marketed device, if such changes or modifications could significantly affect the safety of effectiveness of that device. The FDA prohibits the advertisement or promotion of any approved or cleared device for uses other than those that are stated in the device's approved or cleared application. -3- Pursuant to FDA requirements, we have registered our manufacturing facility with the FDA as a medical device manufacturer, and listed the medical devices we manufacture. We are also subject to inspection on a routine basis for compliance with FDA regulations. This includes the Quality System Requirements, which requires that we manufacture our products and maintain our documents in a prescribed manner with respect to issues such as design controls, manufacturing, testing and validation activities. Further, we are required to comply with other FDA requirements with respect to labeling, and the Medical Device Reporting (MDR) regulation which requires that we provide information to the FDA on deaths or serious injuries alleged to have been associated with the use of our products, as well as product malfunctions that are likely to cause or contribute to death or serious injury if the malfunction were to recur. We believe that we are currently in material compliance with all relevant QSR and MDR requirements. In addition, our facility is required to have a California Medical Device Manufacturing License. The license is not transferable and must be renewed annually. Approval of the license requires that we be in compliance with QSR, labeling and MDR regulations. Our license expires on March 16, 2010. These licenses are renewed periodically, and to date we have never failed to obtain a renewal. Through compliance with FDA and California regulations, we can market our medical devices throughout the United States. International sales of medical devices are also subject to the regulatory requirements of each country. In Europe, the regulations of the European Union require that a device have a "CE Mark" in order to be sold in EU countries. The directive went into effect beginning December 7, 2003. The Company has completed the process for complying with the "CE Mark" directives, In Vitro Directive 98/79/EC, ISO 13485 for medical devices, and Medical Device Directive 93/42/EEC. At present the regulatory international review process varies from country to country. We, in general, rely upon our distributors and sales representatives in the foreign countries in which we market our products to ensure that we comply with the regulatory laws of such countries. We believe that our international sales to date have been in compliance with the laws of the foreign countries in which we have made sales. Exports of most medical devices are also subject to certain FDA regulatory controls. The following products are FDA-cleared and may be sold to clinical laboratories, physician laboratories and/or retail outlets in the United States as well as internationally: ACTH ELISA Kit Anti-thyroglobulin ELISA kit Anti-TPO ELISA Kit AWARE(tm) Breast Self-Examination Kit Calcitonin ELISA Kit Drugs-of-Abuse Rapid Tests Erythropoietin ELISA Kit EZ-HCG Rapid Pregnancy Test Fortel Microalbumin Test EZ-LH(tm) Rapid Ovulation Test EZ Detect(tm) Fecal Occult Blood Test (Physician's package, OTC package) GAP IgG H.Pylori ELISA Kit HS-CRP ELISA Drugs-of-Abuse Rapid Tests Myoglobin ELISA PTH (Intact) ELISA Kit Troponin I ELISA The following products are not FDA-cleared. These are sold internationally and can be sold in the U.S. "FOR RESEARCH ONLY": Allerquant(tm) IgG Food Intolerance ELISA Kit (90-foods, 14-foods, custom kits) Allerquant IgG Food Additives Kit C-Peptide ELISA Kit EZ-PSA Rapid Test EZ-H. Pylori Rapid Test Fortel Cat Allergy Test Fortel Microalbumin Test Fortel(tm) Ultra Midstream Pregnancy Test Fortel(tm) Ovulation Test GAP(tm) IgM H. Pylori ELISA Kit GAP(tm) IgA H. Pylori ELISA Kit Gliadin IgG ELISA Kit Gliadin IgA ELISA Kit Transglutaminase IgA ELISA Kit Isletest(tm) GAD ELISA Kit Isletest(tm) ICA ELISA Kit Isletest(tm) IAA ELISA Kit -4- Biomerica is licensed to design, develop, manufacture and distribute IN VITRO diagnostic and medical devices and is subject to the Code of Federal Regulations, Section 21, parts 800 - 1299. The FDA is the governing body that assesses and issues Biomerica's license to assure that it complies with these regulations. Biomerica is currently licensed, and its last assessment was in March 2006. During the inspection the FDA noted five observations that were corrected in a timely manner. Biomerica is also registered and licensed with the State of California's Department of Health Services. The Company believes that all Biomerica products sold in the U.S. comply with the FDA regulations. Biomerica's Quality Management System is in compliance with the International Standards Organization (ISO) EN ISO 13485:2003. EN ISO 13485:2003 is an internationally recognized standard in which companies establish their methods of operation and commitment to quality. SEASONALITY OF BUSINESS The businesses of the Company and its subsidiary have not been subject to significant seasonal fluctuations. INTERNATIONAL BUSINESS Most of Biomerica's property and equipment are located within Southern California. The Company currently has a minor amount of property and equipment located in Mexico. The following table sets forth the dollar volume of revenue attributable to sales to domestic customers and foreign customers during the last two fiscal years for Biomerica: Year Ended May 31, 2009 2008 Europe $2,631,000 /53.3% $2,549,000 /51.7% U.S. Customers 1,198,000 /24.3% 1,359,000 /27.5% Asia 956,000 /19.4% 854,000 /17.3% S. America 92,000 /1.9% 70,000 /1.4% Middle East 40,000 /.8% 57,000 /1.1% OTHER FOREIGN 18,000 /.3% 38,000 /1.0% ------------------------------------------------------------------------ Total Revenues $4,935,000 /100% $4,927,000 /100% We recognize that our foreign sales could be subject to some special or unusual risks, which are not present in the ordinary course of business in the United States. Changes in economic factors, government regulations, terrorism and import restrictions all could impact sales within certain foreign countries. Foreign countries have licensing requirements applicable to the sale of diagnostic products, which vary substantially from domestic requirements; depending upon the product and the foreign country, these may be more or less restrictive than requirements within the United States. Foreign diagnostic sales at Biomerica are made primarily through a network of approximately 100 independent distributors in approximately 60 countries. INTELLECTUAL PROPERTY We regard the protection of our copyrights, service marks, trademarks and trade secrets as important to our future success. We rely on a combination of copyright, trademark, service mark and trade secret laws and contractual restrictions to establish and protect our proprietary rights in products and services. We have entered into confidentiality and invention assignment agreements with our employees and contractors, and nondisclosure agreements with most of our fulfillment partners and strategic partners to limit access to and disclosure of proprietary information. We cannot be certain that these contractual arrangements or the other steps taken by us to protect our intellectual property will prevent misappropriation of our technology. We have licensed in the past, and expect that we may license in the future, certain of our proprietary rights, such as trademarks or copyrighted material, to third parties. While we attempt to ensure that the quality of our product brands is maintained by such licensees, we cannot be certain that such licensees will not take actions that might hurt the value of our proprietary rights or reputation. BRANDS, TRADEMARKS, PATENTS, LICENSES We registered the tradenames "Fortel", "Isletest", "Nimbus" and "GAP" with the Office of Patents and Trademarks on December 31, 1985. Our unregistered tradenames are "EZ-Detect", "Candiquant," "Candigen", "EZ-H.P." and EZ-PSA". A trademark for "Aware" was issued and assigned in November 2001. In addition, Biomerica holds the following patents: Immunotherapy Agents for Treatment of IgE Mediated Allergies and Allergen-thymic Hormone Conjugates for Treatment of IgE -5- Mediated Allergies, U.S. Patent #5,275,814, issued January 4, 1994 and Diagnostic Test for Measuring Islet Cell Autoantibodies and Reagents Relating Thereto, U.S. Patent #5,786,221, issued July 28, 1998. Biomerica has obtained the rights to manufacture and sell certain products. In some cases royalties are paid on the sales of these products. Biomerica anticipates that it will license or purchase the rights to other products or technology in the future. The laws of some foreign countries do not protect our proprietary rights to the same extent as do the laws of the U.S. Effective copyright, trademark and trade secret protection may not be available in such jurisdictions. Our efforts to protect our intellectual property rights may not prevent misappropriation of our content. In addition, there can be no assurance that Biomerica is not violating any third party patents. On March 27, 2009 the Company signed an Asset Purchase Agreement with a European company for the purchase of certain technology related to the manufacture of certain medical diagnostic tests. Consideration for this purchase was a nominal deposit upon signing the agreement and a nominal transfer fee upon successful commencement of production of the products. A royalty shall be paid for five years beginning on the date of first sale of finished product derived from the Purchased Assets. EMPLOYEES As of May 31, 2009 and 2008, the Company employed 33 employees of whom 2 are part-time employees in the United States. The following is a breakdown between departments: 2009 2008 ------------ Administrative 4 5 Marketing & Sales 3 3 Research & Development 3 3 Production and Operations 23 22 ------------- Total 33 33 In addition, Biomerica contracts with Lancer for the services of 17 people at its Mexican facility. We also engage the services of various outside Ph.D. and M.D. consultants as well as medical institutions for technical support on a regular basis. We are not a party to any collective bargaining agreement and have never experienced a work stoppage. We consider our employee relations to be good. ITEM 1A. RISK FACTORS Distribution - Biomerica has entered into various exclusive and non-exclusive distribution agreements (the "Agreements") which generally specify territories of distribution. The Agreements range in term from one to five years. Biomerica may be dependent upon such distributors for the marketing and selling of its products worldwide during the terms of these agreements. Such distributors are generally not obligated to sell any specified minimum quantities of the Company's product to keep the exclusive while non-exclusive distributors have no minimum purchase requirements. There can be no assurance of the volume of product sales that may be achieved by such distributors. The Company has several large distributors which account for a significant portion of its business. The loss of one of these distributors could adversely affect the Company's financial results. Government Regulation - Biomerica's immunodiagnostic products are regulated in the United States as medical devices primarily by the FDA and as such, require regulatory clearance or approval prior to commercialization in the United States. Pursuant to the Federal Food, Drug and Cosmetic Act, and the regulations promulgated thereunder, the FDA regulates, among other things, the clinical testing, manufacture, labeling, promotion, distribution, sale and use of medical devices in the United States. Failure of Biomerica to comply with applicable regulatory requirements can result in, among other things, warning letters, fines, injunctions, civil penalties, recall or seizure of products, total or partial suspension of production, the government's refusal to grant pre-market clearance or pre-market approval of devices, withdrawal of marketing approvals, and criminal prosecution. Sales of medical devices outside the United States are subject to foreign regulatory requirements that vary widely from country to country. The time required to obtain registrations or approvals required by foreign countries may be longer or shorter than that required for FDA clearance or approval, and requirements for licensing may differ significantly from FDA requirements. There can be no assurance that Biomerica will be able to obtain regulatory clearances for its current or any future products in the United States or in foreign markets. European Community - Biomerica is required to obtain certification in the European community to sell products in those countries. The certification requires Biomerica to maintain certain quality standards. Biomerica has been granted certification and undergoes annual audits to assure that the Company remains in compliance with regulations. There is no assurance that Biomerica will be able to retain its certification in the future. The loss of business or the ability to conduct business in Europe could materially adversely affect the results of the Company. -6- Risk of Product Liability - Testing, manufacturing and marketing of Biomerica's products entails risk of product liability. Biomerica currently has product liability insurance. There can be no assurance, however, that Biomerica will be able to maintain such insurance at a reasonable cost or in sufficient amounts to protect Biomerica against losses due to product liability. An inability to obtain sufficient insurance coverage could prevent or inhibit the commercialization of Biomerica's products. In addition, a product liability claim or recall could have a material adverse effect on the business or financial condition of the Company. Hazardous Materials - Biomerica's manufacturing and research and development involves the controlled use of hazardous materials and chemicals. Although Biomerica believes that safety procedures for handling and disposing of such materials comply with the standards prescribed by state and Federal regulations, the risk of accidental contamination or injury from these materials cannot be completely eliminated. In the event of such an accident, the Company could be held liable for any damages that result and any such liability could exceed the resources of the Company. The Company may incur substantial costs to comply with environmental regulations. Common stock performance - The common stock of the Company is subject to fluctuations as a result of a variety of factors including, but not limited to, financial results, general economic conditions, fluctuations in sales volumes and expenses, competition, and our failure to generate new products. ITEM 2. DESCRIPTION OF PROPERTY The Company is currently leasing its facilities on a month-to-month agreement while it explores various other facility options. The facilities are owned and operated by Ms. Janet Moore (an officer and director of the Company), Ilse Sultanian, Susan Irani Rigdon and Jennifer Irani, some of whom are shareholders. Effective May 1, 2007, the monthly rent was set at $14,000. Management believes there would be no significant difference in the terms of the property rental if the Company was renting from a third party. Total gross rent expense for this facility was approximately $168,000 plus proportionate insurance and real estate taxes per year during each of the years ended May 31, 2009 and 2008, respectively. On June 18, 2009, the Company entered into an agreement to lease a building in Irvine, California, commencing September 1, 2009 and ending August 31, 2016. The initial base rent is set at $18,490 with a security deposit of $22,080. The sum of $40,568 was due upon execution of the lease. Management is currently working on plans for the relocation of the Company which should take place by the end of the calendar year. ITEM 3. LEGAL PROCEEDINGS None. ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS None. PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Since June 20, 2002, the Company's stock has been quoted on the OTC Bulletin Board under the symbol "BMRA.OB". The following table shows the high and low bid prices for Biomerica's common stock for the periods indicated, based upon data reported by Yahoo Finance. Such quotations reflect inter-dealer prices, without retail mark-up, mark-down or commissions, and may not necessarily represent actual transactions. Bid Prices HIGH LOW Quarter ended: May 31, 2009 $0.70 $0.28 February 28, 2009 $0.60 $0.25 November 30, 2008 $0.99 $0.45 August 31, 2008 $1.05 $0.75 May 31, 2008 $1.40 $0.76 February 29, 2008 $1.55 $1.02 November 30, 2007 $1.89 $1.10 August 31, 2007 $1.50 $0.71 -7- As of May 31, 2009, the number of holders of record of Biomerica's common stock was approximately 880, excluding stock held in street name. The number of record holders does not bear any relationship to the number of beneficial owners of the Common Stock. The Company has not paid any cash dividends on its Common Stock in the past and does not plan to pay any cash dividends on its Common Stock in the foreseeable future. The Company's Board of Directors intends, for the foreseeable future, to retain any earnings to finance the continued operation and expansion of the Company's business. The table below provides information relating to our equity compensation plans as of May 31, 2009:
Securities Remaining Available for Future Issuance Securities Number of Securities to Be Compensation Plans Under Compensation Plans Plan Issued Upon Exercise of Weighted-Average Exercise (Excluding those Reflected in Category Outstanding Options Price of Outstanding Options First Column) Equity compensation Plans approved by 1,472,675 $0.54 564,125 Securities holders
ITEM 6. SELECTED FINANCIAL DATA None. -8- ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS EXCEPT FOR HISTORICAL INFORMATION CONTAINED HEREIN, THE STATEMENTS IN THIS FORM 10-K MAY BE FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934 AND SECTION 27A OF THE SECURITIES ACT OF 1933. FORWARD-LOOKING STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS AND UNCERTAINTIES WHICH MAY CAUSE BIOMERICA'S RESULTS IN FUTURE PERIODS TO DIFFER MATERIALLY FROM FORECASTED RESULTS. THESE RISKS AND UNCERTAINTIES INCLUDE, AMONG OTHER THINGS, THE CONTINUED DEMAND FOR THE COMPANY'S PRODUCTS, AVAILABILITY OF RAW MATERIALS, THE STATE OF THE ECONOMY, RESULTS OF RESEARCH AND DEVELOPMENT ACTIVITIES AND THE CONTINUED ABILITY OF THE COMPANY TO MAINTAIN THE LICENSES AND APPROVALS REQUIRED. THESE AND OTHER RISKS ARE DESCRIBED IN THE COMPANY'S ANNUAL REPORT ON FORM 10-K AND IN THE COMPANY'S OTHER FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION. EXCEPT AS MAY BE REQUIRED BY APPLICABLE LAW, WE MAY NOT UPDATE OR REVISE OUR FORWARD-LOOKING STATEMENTS AND THE LACK OF SUCH UPDATE DOES NOT IMPLY THAT ACTUAL EVENTS ARE AS ORIGINALLY EXPRESSED BY SUCH FORWARD-LOOKING STATEMENTS. YOU SHOULD READ THE DISCLOSURES IN THIS REPORT AND OTHER REPORTS WHICH WE FILE WITH THE SECURITIES AND EXCHANGE COMMISSION. RESULTS OF OPERATIONS Fiscal 2009 Compared to Fiscal 2008 Our consolidated net sales were $4,934,771 for fiscal 2009 compared to $4,926,505 for fiscal 2008. This represents an increase of $8,266, or 0% for fiscal 2009. Cost of sales in fiscal 2009 as compared to fiscal 2009 increased by $174,025 or 6.2%. The percentage of cost of sales relative to sales increased from 56.7% to 60.0%, or by 3.3% due to various factors which included write-offs in fiscal 2009 of new product scrap, obsolete inventory, increased reserves for slow-moving inventory and to lower capitalization of labor and overhead into inventory on some work in process and finished goods. Selling, general and administrative costs increased in fiscal 2009 as compared to fiscal 2008 by $76,848 or 5.6%. These increases were a result of a variety of factors which included increase in the reserve for bad debt, Sarbanes-Oxley consulting, trade show expense, wages, option expense and startup costs for Biomerica Europe GmbH, the Company's newly formed subsidiary. Research and development expense was $278,308 in fiscal 2009 as compared to $259,085 in fiscal 2008. This is an increase of $19,223, or 7.4%. The Company continues to work on the development of several new products and anticipates that it will increase its efforts for development and product approvals in the next fiscal year. Interest expense decreased from $49,542 to $27,521 in fiscal 2009 as compared to fiscal 2008, or 44.4%. The change in interest expense resulted from the decrease in the balance on the shareholder/note payable and the equipment loan, as well as a decrease in the interest rate on the accrued wages payable and equipment loan. Interest income decreased from $33,552 to $29,867, primarily due to lower interest rates. Other income decreased by $1,132,370 in fiscal 2009 as compared to fiscal 2008. This decrease was a result of one-time income from the sale of the Company's interest in Lancer Orthodontics as well as income received as a result of the one-time sale of a warrant held in Hollister-Stier in fiscal 2008. LIQUIDITY AND CAPITAL RESOURCES As of May 31, 2009, the Company had cash and cash equivalents in the amount of $1,595,823, and a short-term investment (certificate of deposit) of $100,000 as compared to $2,022,380 of cash and cash equivalents as of May 31, 2008. As of May 31, 2009 and 2008, the Company had working capital of $3,831,112 and $3,428,936, respectively. In May 2008 the Company sold its investment in Lancer Orthodontics, Inc., for a net amount of $1,083,444, which increased the cash position of the Company. In June 2007 the Company also exercised a warrant and sold the underlying shares that it owned in Hollister-Stier (valued on the books at zero cost) for a net amount of $697,034. During 2009, cash used in operations was $101,999 as compared to cash used in fiscal 2008 of $194,595. During fiscal 2009, cash used in investing activities was $215,890 as compared to cash provided by investing activities of $1,515,695 in fiscal 2008. Cash of $85,890 and $264,783 for fiscal 2009 and 2008, respectively, was used for the purchase of property and equipment. In fiscal 2008 proceeds from the sale of marketable securities was $1,780,478. Cash used in financing activities in fiscal 2009 was $106,942 as compared to cash provided by financing activities of $184,380 in fiscal 2008. During fiscal 2009, Biomerica repaid shareholder debt of $95,936 as compared to $61,056 in fiscal 2008. The change in cash and cash equivalents at May 31, 2009 compared to May 31, 2008 was a decrease of $426,557. -9- On February 13, 2009, the Company entered into a Small Business Banking Agreement with Union Bank of California for a one year business line (the "Line") of credit in the amount of $400,000. The interest rate for the line of credit is the prime rate in effect on the first day of the billing period, as published in the Wall Street Journal Prime West Coast Edition, plus a spread of 1.00%. Minimum monthly payments will be the sum of (i) the amount of interest charge for the billing period, plus (ii) any amount past due, plus (iii) any fees, late charges and/or out-of-pocket expenses assessed. If the Line is not renewed as of the last day of the term of the Line, the entire unpaid balance of the Line, including unpaid fees and charges will be due and payable. The Company has granted the bank security interest in the assets of the Company as collateral. The Company must maintain for not less than thirty consecutive days in every calendar year, a period in which all amounts due under the revolving credit agreements with the Bank are at a zero balance. The Company did not owe anything on this line of credit as of May 31, 2009. In February 2007 the Company obtained a $200,000 working capital line of credit and was approved for a $200,000 equipment loan with Commercial Bank of California. The credit line and the equipment loan were collateralized by substantially all of the assets of the Company. On February 13, 2009 the Company entered into a Small Business Bank Agreement for a Business Loan with Union Bank for $133,000. Loan proceeds were disbursed in one single funding on March 5, 2009. The loan was used for the purpose of paying off the business loan, which had been established with Commercial Bank, for the acquisition of manufacturing equipment. As of May 31, 2009 and 2008, $122,781 and $162,993 was owed on the equipment loan and there was no outstanding balance due on the working capital line of credit, respectively. The loan is payable in thirty-six monthly payments of approximately $4,000. The interest rate is 6.50% and the payments are to be made by automatic deduction from the Company's Union Bank account. Initial fees for the loan were $740. Payments on the shareholder's note payable were made during fiscal 2009, according to the agreement through July 31, 2008, at which time the remaining balance on the loan was paid in full. As of May 31, 2009, the Company no longer has a line of credit with Commercial Bank of California. SUBSEQUENT EVENTS On June 18, 2009, the Company entered into an agreement to lease a building in Irvine, California, commencing September 1, 2009 and ending August 31, 2016. The initial base rent is set at $18,490 with a security deposit of $22,080. The sum of $40,568 was due upon execution of the lease. Management is currently working on plans for the relocation of the Company which should take place by the end of the calendar year. CRITICAL ACCOUNTING POLICIES The discussion and analysis of our financial condition and results of operations are based on the consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. Note 2 of the Notes to Consolidated Financial Statements describes the significant accounting policies essential to the consolidated financial statements. The preparation of these financial statements requires estimates and assumptions that affect the reported amounts and disclosures. In general, the critical accounting policies that may require judgments or estimates relate specifically to the Allowance for Doubtful Accounts, Inventory Reserves for Obsolescence and Declines in Market Value, Impairment of Long-Lived Assets, Stock Based Compensation, and Income Tax Accruals. We believe the following to be critical accounting policies as they require more significant judgments and estimates used in the preparation of our consolidated financial statements. Revenues from product sales are recognized at the time the product is shipped, customarily FOB shipping point, at which point title passes. An allowance is established if necessary for estimated returns as revenue is recognized. The Allowance for Doubtful Accounts is established for estimated losses resulting from the inability of our customers to make required payments. The assessment of specific receivable balances and required reserves is performed by management and discussed with the audit committee. We have identified specific customers where collection is not probable and have established specific reserves, but to the extent collection is made, the allowance will be released. Additionally, if the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. -10- Reserves are provided for excess and obsolete inventory, which are estimated based on a comparison of the quantity and cost of inventory on hand to management's forecast of customer demand. Customer demand is dependent on many factors and requires us to use significant judgment in our forecasting process. We must also make assumptions regarding the rate at which new products will be accepted in the marketplace and at which customers will transition from older products to newer products. Once a reserve is established, it is maintained until the product to which it relates is sold or otherwise disposed of, even if in subsequent periods we forecast demand for the product. Historically we were in a loss position for tax purposes, and established a valuation allowance against deferred tax assets, as we did not believe it was likely that we would generate sufficient taxable income in future periods to realize the benefit of our deferred tax assets. Although the Company has achieved net income in increasing amounts over the last four fiscal years, predicting future taxable income is difficult, and requires the use of significant judgment. Due to the fact that many factors can influence profitability, management determined at May 31, 2008, that $170,000 of previously allowed for deferred tax assets should be released, which resulted in an income tax benefit of $170,000 being recognized. Management has determined that the tax asset should be increased to $238,000 as of May 31, 2009. Management will re-evaluate this determination periodically. FACTORS THAT MAY AFFECT FUTURE RESULTS You should read the following factors in conjunction with the factors discussed elsewhere in this and our other filings with the Securities and Exchange Commission and in materials incorporated by reference in these filings. The following is intended to highlight certain factors that may affect the financial condition and results of operations of Biomerica, Inc. and are not meant to be an exhaustive discussion of risks that apply to companies such as Biomerica, Inc. Like other businesses, Biomerica, Inc. is susceptible to macroeconomic downturns in the United States or abroad, as were experienced in recently, that may affect the general economic climate and performance of Biomerica, Inc. or its customers. Aside from general macroeconomic downturns, the additional material factors that could affect future financial results include, but are not limited to: Terrorist attacks and the impact of such events; diminished access to raw materials that directly enter into our manufacturing process; shipping labor disruption or other major degradation of the ability to ship out products to end users; inability to successfully control our margins which are affected by many factors including competition and product mix; protracted shutdown of the U.S. border due to an escalation of terrorist or counter terrorist activity; any changes in our business relationships with international distributors or the economic climate they operate in; any event that has a material adverse impact on our foreign manufacturing operations may adversely affect our operations as a whole; failure to manage the future expansion of our business could have a material adverse affect on our revenues and profitability; possible costs in complying with government regulations and the delays in receiving required regulatory approvals or the enactment of new adverse regulations or regulatory requirements; numerous competitors, some of which have substantially greater financial and other resources than we do; potential claims and litigation brought by patients or medical professionals alleging harm caused by the use of or exposure to our products; quarterly variations in operating results caused by a number of factors, including business and industry conditions; difficulties encountered during the impending move of the Company's operations to its new facility and other factors beyond our control. All these factors make it difficult to predict operating results for any particular period. RECENT ACCOUNTING PRONOUNCEMENTS In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements--an amendment of ARB No. 51. This statement applies to all entities that prepare consolidated financial statements, except for non-profit organizations, but will affect only those entities that have an outstanding noncontrolling interest in one or more subsidiaries or that deconsolidate a subsidiary. SFAS No. 160 is effective for annual periods beginning December 15, 2008. The Company does not believe that the adoption of SFAS No. 160 will have a material impact on its financial statements. In December 2007, the FASB issued SFAS No. 141R, Business Combinations. SFAS 141R establishes a defined measurement period that governs the time period within which the business combination must be reported. In addition, the revised standard significantly expands the scope of disclosure requirements. SFAS No. 141R is effective for annual periods beginning after December 15, 2008. The Company does not believe that the adoption of SFAS No. 141R will have a material impact on its financial statements. In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities-an Amendment of FASB Statement No. 133. This Statement requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of and gains and losses on derivative instruments, and disclosures about credit-risk- related contingent features in derivative agreements. SFAS No. 161 is effective for financial statements issue years and interim periods beginning after November 15, 2008. The Company does not believe that the adoption of SFAS No. 161 will have a material impact on its financial statements. -11- In May, 2009 the FASB issued SFAS No. 165, "Subsequent Events". This statement established general standards of accounting for disclosure of events that occur after the balance sheet date but before financial statement are issued or are available to be issued. It requires the disclosure date through which an entity has evaluated subsequent events and the basis for that date. This would alert all users of financial statements that an entity has not evaluated subsequent events after that in the set of financial statements being presented. This statement is effective for interim and annual periods ending after June 15, 2009. The Company does not believe that the adoption of SFAS No. 165 will have a material impact on its financial statements. The FASB issued SFAS No. 168, "The FASB Accounting Standards Codification (Codification) and the Hierarchy of Generally Accepted Accounting Principles- a replacement of Financial Statement No. 162". On the effective date of the statement, The FASB Accounting Standards Codification will become the source of authoritative U.S. generally accepted accounting principles (GAAP) recognized by the FASB to be applied by nongovernmental entities. This statement is effective for financial statements issued for interim and periods ending after September 15, 2009. The Company does not believe that the adoption of SFAS No. 168 will have a material impact on its financial statements. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK None ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Exhibit 99.3, "Biomerica, Inc. and Subsidiary Consolidated Financial Statements" is incorporated herein by this reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. ITEM 9A. DISCLOSURE CONTROLS AND PROCEDURES Attached as exhibits to this Form 10-K are certifications of our Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO") that are required in accordance with Rule 13a-14 of the Exchange Act. This "Disclosure Controls and Procedures" section includes information concerning the controls and controls evaluation referred to in the certifications. EVALUATION OF DISCLOSURE CONTROLS Our management evaluated the effectiveness of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act as of the end of the period covered by this report. Our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. The disclosure controls and procedures have been designed to provide reasonable assurance of achieving their objectives and the Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are effective at the "reasonable assurance" level. Based on that evaluation the Chief Executive Officer and Chief Financial Officer concluded that information required to be disclosed in the reports that we file and submit under the Exchange Act is (1) recorded, processed, summarized and reported within the time periods specified in the Commission's rules and forms; and (2) accumulated and communicated to the Company's management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. For the reasons discussed in "Management's Report on Internal Control over Financial Reporting" below, Company management, including the Chief Executive Officer and Chief Financial Officer concluded that, as of May 31, 2009, the Company's internal control over financial reporting was effective. Management has concluded that the consolidated financial statements included in this annual report present fairly, in all material respects, the Company's financial position, results of operations, and cash flows for the periods presented in conformity with accounting principles generally accepted in the United States of America. CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING There have been no changes in our internal control over financial reporting identified in connection with the evaluation that occurred during the last fiscal quarter that has materially affected, or that is reasonably likely to affect, our internal control over financial reporting. -12- MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING Company management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934. The Company's internal control over financial reporting is designed to provide reasonable assurance to the Company's management and Board of Directors regarding the reliability of financial reporting and the preparation and fair presentation of financial statements for external purposes in accordance with generally accepted accounting principles. A Company's internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements. The effectiveness of any system of internal control over financial reporting is subject to inherent limitations, including the exercise of judgment in designing, implementing, operating and evaluating the controls and procedures. Because of these inherent limitations, internal control over financial reporting cannot provide absolute assurance regarding the reliability of financial reporting and may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Company management, with the participation of the Chief Executive Officer and the Chief Financial Officer, evaluated the effectiveness of the Company's disclosure controls and procedures as defined in Rules 13(a)-15(e) and 15(d)-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act, as of the end of the period covered by this report. In making this assessment, Management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control - Integrated Framework. Based on this assessment, management, with the participation of the Chief Executive Officer and Chief Financial Officer, believes that, as of May 31, 2009, the Company's internal control over financial reporting was effective based on those criteria. Company management will continue to monitor and evaluate the effectiveness of its disclosure controls and procedures and its internal controls over financial reporting on an ongoing basis and are committed to taking further action and implementing improvements, as necessary and as funds allow. Note: This 10-K does not include an attestation report of the Company's registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by the Company's registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management's report in this 10-K. PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT. This information is incorporated by reference to the Company's proxy statement for its 2009 Annual Meeting of Stockholders, which will be filed not later than 120 days after the end of the Company's fiscal year ended May 31, 2009. ITEM 11. EXECUTIVE COMPENSATION This information is incorporated by reference to the Company's proxy statement for its 2009 Annual Meeting of Stockholders, which will be filed not later than 120 days after the end of the Company's fiscal year ended May 31, 2009. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT This information is incorporated by reference to the Company's proxy statement for its 2009 Annual Meeting of Stockholders, which will be filed not later than 120 days after the end of the Company's fiscal year ended May 31, 2009. -13- ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS In fiscal 2003, Biomerica entered into an agreement with Lancer whereby Biomerica agreed to pay an initial shelter fee of $5,000 with additional monthly payments of $2,875 for use of the Lancer de Mexico facilities to produce and manufacture Biomerica products. The monthly payments are due as long as Biomerica produces its products at the Lancer de Mexico facility. At May 31, 2009, Biomerica has paid all applicable shelter fees. Other information regarding related transactions is incorporated by reference to the Company's proxy statement for its 2009 Annual Meeting of Stockholders, which will be filed not later than 120 days after the end of the Company's fiscal year ended May 31, 2009. ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES The aggregate fees billed for professional services by PKF in 2009 and 2008 were as follows: 2009 2008 ---- ---- Audit fees $72,182(1) $58,198(2) Audit related fees -- -- Tax fees 6,043 9,874 ALL OTHER FEES 784 3,792 - --------------------------------------------------------- Total $79,009 $71,864 (1) Also includes fees to be billed in fiscal 2010 for fiscal 2009. (2) Also includes fees to be billed in fiscal 2009 for fiscal 2008. Audit Fees consist of the aggregate fees billed for professional services rendered for the audit of our annual financial statements, the audit of our subsidiary's financial statements, the reviews of the financial statements included in our Forms 10-Q and for any other services that are normally provided by PKF in connection with our statutory and regulatory filings or engagements. Audit Related Fees consist of the aggregate fees billed for professional services rendered for assurance and related services that were reasonably related to the performance of the audit or review of our financial statements and the financial statements of our subsidiary that were not otherwise included in Audit Fees. Tax Fees consist of the aggregate fees billed for professional services rendered for tax compliance, tax advice and tax planning. Included in such Tax Fees were fees for preparation of our tax returns and consultancy and advice on other tax planning matters. All Other Fees consist of the aggregate fees billed for products and services provided by PKF and not otherwise included in Audit Fees, Audit Related fees or Tax Fees. POLICY ON AUDIT COMMITTEE PRE-APPROVAL OF AUDIT AND NON-AUDIT SERVICES The Audit Committee has the responsibility of appointing the independent audit firm and overseeing their work. The Audit Committee pre-approves all audit and related services. Should the audit committee pre-approve any services other than audit and related services, it evaluates whether the services would compromise the auditor's independence. Of the services provided in fiscal 2009 and 2008, all fees and services were pre-approved by the audit committee. PART IV ITEM 15. EXHIBITS LIST AND REPORTS ON FORM 8-K EXHIBIT NO. DESCRIPTION 3.1 Certificate of Incorporation of Registrant filed with the Secretary of the State of Delaware on September 22, 1971 (incorporated by reference to Exhibit 3.1 filed with Amendment No. 1 to Registration Statement on Form S-1, Commission File No. 2-83308). 3.2 Certificate of Amendment to Certificate of Incorporation of Registrant filed with the Secretary of the State of Delaware on February 6, 1978 (incorporated by reference to Exhibit 3.1 filed with Amendment No. 1 to Registration Statement on Form S-1, Commission File No. 2-83308). -14- 3.3 Certificate of Amendment to Certificate of Incorporation of Registrant filed with the Secretary of the State of Delaware on February 4, 1983 (incorporated by reference to Exhibit 3.1 filed with Amendment No. 1 to Registration Statement on Form S-1, Commission File No. 2-83308). 3.4 Certificate of Amendment to Certificate of Incorporation of Registrant filed with the Secretary of the State of Delaware on January 19, 1987 (incorporated by reference to Exhibit 3.4 filed with Form 8 Amendment No. 1 to the Registrant's Annual Report on Form 10-K for the fiscal year ended May 31, 1987). 3.5 Certificate of Amendment of Certificate of Incorporation of Registrant filed with the Secretary of the State of Delaware on November 4, 1987 (incorporated by reference to Exhibit 3.1 filed with Amendment No. 1 to Registration Statement on Form S-1, Commission File No. 2-83308). 3.6 Bylaws of the Registrant (incorporated by reference to Exhibit 3.2 filed with Amendment No. 1 to Registration Statement on Form S-1, Commission File No. 2-83308). 3.7 Certificate of Amendment of Certificate of Incorporation of Registrant filed with the Secretary of the State of Delaware on December 20, 1994 (incorporated by reference to Exhibit 3.7 filed with Registrant's Annual Report on Form 10-KSB for the fiscal year ended May 31, 1995). 3.8 First Amended and Restated Certificate of Incorporation of Biomerica, Inc. filed with the Secretary of State of Delaware on August 1, 2000 (incorporated by reference to Exhibit 3.8 filed with the Registrant's Annual Report on Form 10-KSB for the fiscal year ended May 31, 2000). 4.1 Specimen Stock Certificate of Common Stock of Registrant (incorporated by reference to Exhibit 4.1 filed with Registrant's Registration Statement on Form SB-2, Commission No. 333-87231 filed on September 16, 1999). 10.3 1999 Stock Incentive Plan of Registrant (incorporated by reference to Exhibit 10.1 to Registration Statement on Form S-8 filed with the Securities and Exchange Commission on March 29, 2000 and on May 30 , 2007). 10.4 1995 Stock Option and Common Stock Plan of Registrant (incorporated by reference to Exhibit 4.3 to Registration Statement on Form S-8 filed with the Securities and Exchange Commission on January 20, 1996). 10.5 1991 Stock Option and Restricted Stock Plan of Registrant (incorporated by reference to Exhibit 4.1 to Registration Statement on Form S-8 filed with the Securities and Exchange Commission on April 6, 1992). 10.31 Loan Modification, Forbearance and Security Agreement (incorporated by reference to the Company's February 29, 2004 Form 10-QSB filed April 14, 2004). 10.32 Promissory Note (incorporated by reference to the Company's February 29, 2004 Form 10-QSB filed April 14, 2004). 10.33 Second Amendment of the Note, Loan and Modification Agreement (incorporated by reference to the Company's February 28, 2007 Form 10-QSB filed April 16, 2007). 10.34 Commercial Security Agreement (loan #0100000250) with Commercial Bank of California dated February 20, 2007 (incorporated by reference to the Company's February 28, 2007 Form 10-QSB filed April 16, 2007). 10.35 Promissory Note (loan #0100000250) dated February 20, 2007 with Commercial Bank of California (incorporated by reference to the Company's February 28, 2007 Form 10-QSB filed April 16, 2007). 10.36 Promissory Note (loan #0100000251) dated February 20, 2007 with Commercial Bank of California (incorporated by reference to the Company's February 28, 2007 Form 10-QSB filed April 16, 2007). 10.37 Subordination Agreement (loan #0100000250) dated February 20, 2007 with Commercial Bank of California and Janet Moore, Trustee of the Janet Moore Trust (incorporated by reference to the Company's February 28, 2007 Form 10-QSB filed April 16, 2007). 10.38 Business Loan Agreement with Commercial Bank of California (incorporated by reference to the Company's February 28, 2007 Form 10-QSB filed April 16, 2007). -15- 10.39 Small Business Banking Agreement (Business Line of Credit Number 0366422012) with Union Bank (incorporated by reference to the Company's February 28, 2009 Form 10Q filed April 14, 2009). 10.40 Small Business Banking Agreement (Business Loan Number 0366422020) with Union Bank (incorporated by reference to the Company's February 28, 2009 Form 10Q filed April 14, 2009). 23.1 Consent of Independent Registered Public Accounting Firm (PKF). 31.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 99.3 Biomerica, Inc. and Subsidiary Consolidated Financial Statements For The Years Ended May 31, 2009 and 2008 and Independent Registered Public Accounting Firm's Report. (b) Reports on Form 8-K. None. -16- SIGNATURES In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. BIOMERICA, INC. Registrant By: /s/ Zackary S. Irani --------------------- Zackary S. Irani, Chief Executive Officer Dated: 8/29/09 In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated: Signature and Capacity /s/ Zackary S. Irani Date: 8/29/09 - -------------------- Zackary S. Irani Director, Chief Executive Officer /s/ Janet Moore Date: 8/29/09 - ---------------- Janet Moore, Secretary, Director, Chief Financial Officer /s/ Francis R. Cano, PH.D. Date: 8/29/09 - -------------------------- Francis R. Cano, Ph.D. Director /s/ Allen Barbieri Date: 8/29/09 - --------------------- Allen Barbieri Director /s/ Jane Emerson, M.D., PH.D. Date: 8/29/09 - -------------------------------- Jane Emerson, M.D.,Ph.D. Director /s/ John Roehm Date: 8/29/09 - ---------------- John Roehm Director -17- EX-23.1 2 biomerica_10k-ex2301.txt CONSENT EXHIBIT 23.1 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Biomerica, Inc. Newport Beach, California We hereby consent to the incorporation by reference in, the previously filed Registration Statements on Form S-8 (Nos. 333-33494, 333-00159 and 333-143346) of Biomerica and Subsidiary, of our report dated August 28, 2009, relating to the consolidated financial statements as of May 31, 2009 and 2008 and for the years ended May 31, 2009 and 2008, which appears in this Form 10-K. /s/ PKF Certified Public Accountants A Professional Corporation San Diego, CA August 28, 2009 EX-31.1 3 biomerica_10k-ex3101.txt CERTIFICATION EXHIBIT 31.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Zackary S. Irani, certify that: 1. I have reviewed this Annual Report on Form 10-K of Biomerica, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects, the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiary, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of our internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or other persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. /s/ Zackary S. Irani - -------------------- Zackary S. Irani Chief Executive Officer Date: August 29, 2009 EX-31.2 4 biomerica_10k-ex3102.txt CERTIFICATION EXHIBIT 31.2 CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Janet Moore, certify that: 1. I have reviewed this Annual Report on Form 10-K of Biomerica, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects, the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiary, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of our internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or other persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. /s/ Janet Moore - ---------------------- Janet Moore Chief Financial Officer Date: August 29, 2009 EX-32.1 5 biomerica_10k-ex3201.txt CERTIFICATION EXHIBIT 32.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Biomerica, Inc. (the "Company") on Form 10-K for the year ended May 31, 2009, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Zackary Irani, Chief Executive Officer of the Company, certify, to the best of my knowledge, Pursuant to Exchange Act Rule 15d-14(b) and 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes Oxley Act of 2002, i. The Report fully complies with the requirements of Sections 13(a) or 15(d) of the Securities Exchange Act of 1934, and ii. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Zackary S. Irani - -------------------- Zackary S. Irani Chief Executive Officer Date: August 29, 2009 EX-32.2 6 biomerica_10k-ex3202.txt CERTIFICATION EXHIBIT 32.2 CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Biomerica, Inc. (the "Company") on Form 10-K for the year ended May 31, 2009, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Janet Moore, Chief Financial Officer of the Company, certify, to the best of my knowledge, Pursuant to Exchange Act Rule 15d-14(b) and 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes Oxley Act of 2002, i. The Report fully complies with the requirements of Sections 13(a) or 15(d) of the Securities Exchange Act of 1934, and ii. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Janet Moore - ----------------------- Janet Moore Chief Financial Officer Date: August 29, 2009 EX-99.3 7 biomerica_10k-ex9903.txt FINANCIAL STATEMENTS Exhibit 99.3 BIOMERICA, INC. AND SUBSIDIARY TABLE OF CONTENTS Report Of Independent Registered Public Accounting Firm FS-2 CONSOLIDATED FINANCIAL STATEMENTS Consolidated Balance Sheets as of May 31, 2009 and 2008 FS-3 Consolidated Statements of Operations and Comprehensive Income for the Years Ended May 31, 2009 and 2008 FS-4 - FS-5 Consolidated Statements of Shareholders' Equity for the Years Ended May 31, 2009 and 2008 FS-6 - FS-9 Consolidated Statements of Cash Flows for the Years Ended May 31, 2009 and 2008 FS-10 - FS-11 Notes to the Consolidated Financial Statements FS-12 - FS-26
FS-1 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Board of Directors and Stockholders Biomerica, Inc. Newport Beach, California We have audited the accompanying consolidated balance sheet of Biomerica, Inc. (a Delaware Corporation) and its subsidiary as of May 31, 2009 and 2008 and the related consolidated statements of operations and comprehensive income, shareholders' equity, and cash flows for the years ended May 31, 2009 and 2008. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We have conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal controls over financial reporting. Our audits included consideration of internal controls over financial reporting as a basis for designing audit procedures that are appropriate in the circumstance, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Biomerica, Inc. as of May 31, 2009 and 2008, and the results of its consolidated operations and cash flows for the years ended May 31, 2009 and 2008 in conformity with accounting principles generally accepted in the United States of America. August 28, 2009 /s/ PKF San Diego California Certified Public Accountants A Professional Corporation FS-2
BIOMERICA, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEET May 31, 2009 May 31, 2008 ------------ ------------ ASSETS CURRENT ASSETS: Cash and cash equivalents $ 1,595,823 $ 2,022,380 Short-term investment 100,000 -- Available-for-sale securities -- 355 Accounts receivable, less allowance for doubtful accounts of $86,432 and $84,206, respectively 640,668 614,330 Inventories, net 1,999,463 1,764,202 Deferred tax asset 103,000 35,000 Prepaid Expenses and Other 115,717 101,867 ------------ ------------ Total Current Assets 4,554,671 4,538,134 ------------ ------------ PROPERTY AND EQUIPMENT, at cost Equipment 944,646 897,664 Furniture, Fixtures and Leasehold Improvements 190,331 187,873 ------------ ------------ Total Property and Equipment 1,134,977 1,085,537 ------------ ------------ ACCUMULATED DEPRECIATION (768,158) (715,957) ------------ ------------ Net property and equipment 366,819 369,580 DEFERRED TAX ASSET-LONG-TERM 135,000 135,000 INTANGIBLE ASSETS 30,000 -- OTHER ASSETS 65,582 64,997 ------------ ------------ $ 5,152,072 $ 5,107,711 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable and accrued expenses $ 263,998 $ 473,539 Accrued compensation 417,307 487,115 Capital lease - short-term portion -- 4,180 Note payable-shareholder -- 95,936 Loan for Equipment Purchase - Current-term 42,254 48,428 ------------ ------------ Total Current Liabilities 723,559 1,109,198 LOAN FOR EQUIPMENT PURCHASE - LONG-TERM 80,527 114,565 SHAREHOLDERS' EQUITY Common stock, $.08 par value; 25,000,000 shares authorized; 6,631,039 and 6,489,839 shares and issued and outstanding, respectively 530,482 519,186 Additional paid in capital 17,502,986 17,407,096 Common stock subscribed -- 3,000 Accumulated other comprehensive loss (1,726) (7,398) Accumulated Deficit (13,683,756) (14,037,936) ------------ ------------ Total Shareholders' Equity 4,347,986 3,883,948 ------------ ------------ $ 5,152,072 $ 5,107,711 ============ ============ See report of independent registered public accounting firm and accompanying notes to consolidated financial statements. FS-3 BIOMERICA, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME YEARS ENDED MAY 31 2009 2008 ----------- ----------- NET SALES $ 4,934,771 $ 4,926,505 Cost of Sales 2,964,908 2,790,883 ----------- ----------- GROSS PROFIT 1,969,863 2,135,622 ----------- ----------- OPERATING EXPENSES Selling, general and administrative 1,443,896 1,367,048 Research and Development 278,308 259,085 ----------- ----------- Total Operating Expenses 1,722,204 1,626,133 ----------- ----------- INCOME FROM OPERATIONS BEFORE INCOME TAX 247,659 509,489 OTHER (INCOME) EXPENSE Interest expense 27,521 49,542 Interest income (29,867) (33,552) Other Income (17,175) (1,149,545) ----------- ----------- INCOME TAX (BENEFIT) EXPENSE (87,000) (67,000) ----------- ----------- NET INCOME $ 354,180 $ 1,710,044 =========== =========== BASIC NET INCOME PER COMMON SHARE $ 0.05 $ 0.28 =========== =========== DILUTED NET INCOME PER COMMON SHARE $ 0.05 $ 0.25 =========== =========== WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON EQUIVALENT SHARES Basic 6,619,399 6,125,981 =========== =========== Diluted 7,007,601 6,978,039 =========== =========== See report of independent registered public accounting firm and accompanying notes to consolidated financial statements. FS-4 BIOMERICA, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (CONTINUED) YEARS ENDED MAY 31, 2009 2008 ----------- ----------- NET INCOME $ 354,180 $ 1,710,044 OTHER COMPREHENSIVE (LOSS) INCOME, net of tax Unrealized gain on available-for-sale securities -- 673,030 Foreign currency translation (1,726) -- Reclassification Adjustment, Net of Tax -- (450,711) ----------- ----------- COMPREHENSIVE INCOME $ 352,454 $ 1,932,363 =========== =========== See report of independent registered public accounting firm and accompanying notes to consolidated financial statements. FS-5 BIOMERICA, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY Additional Common Stock Common Stock Paid-in Subscribed Shares Amount Capital Shares Amount --------- ----------- ----------- ------ ----------- Balances, May 31, 2007 5,944,214 $ 475,535 $17,254,714 -- $ -- Exercise of stock options 545,625 43,651 115,735 12,000 3,000 Change in unrealized gain (loss) on available-for-sale securities -- -- -- -- -- Compensation expense in connection with options and warrants granted -- -- 36,647 -- -- Net Income -- -- -- -- -- --------- ----------- ----------- ------ ----------- Balances, May 31, 2008 6,489,839 $ 519,186 $17,407,096 12,000 $ 3,000 ========= =========== =========== ====== =========== (Continued) FS-6 BIOMERICA, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (CONTINUED) Accumulated Common Other Stock Comprehensive Subscribed Income Accumulated Receivable (Loss) Deficit Total ---------- ------------ ------------ ------------ Balances, May 31, 2007 -- $ (229,717) $(15,747,980) $ 1,752,552 Exercise of stock options -- -- -- 162,386 Change in unrealized gain (loss) on available-for-sale securities -- 222,319 -- 222,319 Compensation expense in connection with options and warrants granted -- -- -- 36,647 Net Income -- -- 1,710,044 1,710,044 --------- ------------ ------------ ------------ Balances, May 31, 2008 -- $ (7,398) $(14,037,936) $ 3,883,948 ========= ============ ============ ============ (Continued) FS-7 BIOMERICA, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (CONTINUED) Additional Common Stock Common Stock Paid-in Subscribed Shares Amount Capital Shares Amount --------- ----------- ----------- ------- ----------- Exercise of stock options and warrants 141,200 11,296 25,090 (12,000) (3,000) Realized loss on available-for-sale securities -- -- -- -- -- Foreign currency translation -- -- -- -- -- Tax effect of exercise of stock options and warrants -- -- 17,710 -- -- Compensation expense in connection with options and warrants granted -- -- 53,090 -- -- NET INCOME -- -- -- -- -- --------- ----------- ----------- ------- ----------- Balances, May 31, 2009 6,631,039 $ 530,482 $17,502,986 -- $ -- ========= =========== =========== ======= =========== (Continued) FS-8 BIOMERICA, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (CONTINUED) Accumulated Common Other Stock Comprehensive Subscribed Income Accumulated Receivable (Loss) Deficit Tota ---------- ----------- ------------ ------------ Exercise of stock options and warrants -- -- -- 33,386 Realized loss on available-for-sale securities -- 7,398 -- 7,398 Foreign currency translation -- (1,726) -- (1,726) Tax effect of exercise of stock options and warrants -- -- -- 17,710 Compensation expense in connection with options and warrants granted -- -- -- 53,090 Net Income -- -- 354,180 354,180 -------- ------------ ------------ ------------ Balances, May 31, 2009 $ -- $ (1,726) $(13,683,756) $ 4,347,986 ======== ============ ============ ============ See report of independent registered public accounting firm and accompanying notes to consolidated financial statements. FS-9 BIOMERICA, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS For the Years Ended May 31, 2009 2008 ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 354,180 $ 1,710,044 Adjustments to reconcile net income to net cash used in operating activities: Depreciation and amortization 88,651 65,827 Provision for losses on accounts receivable 2,226 25,423 Inventory reserve 134,924 29,810 Loss (Gain) or write-down on available-for-sale securities 7,753 (1,147,845) Tax effect of exercise of stock options and warrants 17,710 -- Compensation expense in connection with options and warrants granted 53,090 36,647 Changes in assets and liabilities: Accounts receivable (28,564) (134,986) Inventories (370,185) (332,299) Prepaid expenses and other (13,850) 27,568 Other assets (585) (31,598) Accounts payable and other accrued expenses (209,541) (192,710) Increase in deferred tax asset (68,000) (170,000) Accrued Compensation (69,808) (80,476) ----------- ----------- Net Cash Used in Operating Activities (101,999) (194,595) ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES Investment in certificate of deposit (100,000) -- Proceeds from sale of available-for-sale securities -- 1,780,478 Purchases of property and equipment (85,890) (264,783) Purchase of Intangible Assets (30,000) -- ----------- ----------- Net Cash (Used In) Provided by Investing Activities (215,890) 1,515,695 =========== =========== (Continued) FS-10 BIOMERICA, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) For the Years Ended May 31, 2009 2008 ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES Payments on capital leases (4,180) (4,394) Decrease of shareholder debt (95,936) (61,056) Payment of common stock subscribed (3,000) -- Exercise of stock options and warrants 36,386 148,507 Borrowings on loan for equipment purchase 133,000 119,530 Payments On Loan for Equipment (173,212) (18,207) ----------- ----------- Net Cash (Used In) Provided by Financing Activities (106,942) 184,380 ----------- ----------- Effect of Exchange Rate Changes On Cash (1,726) -- ----------- ----------- Net Change in Cash and Cash Equivalents (426,557) 1,505,480 ----------- ----------- CASH AND CASH EQUIVALENTS, beginning of year 2,022,380 516,900 ----------- ----------- CASH AND CASH EQUIVALENTS, end of year $ 1,595,823 $ 2,022,380 =========== =========== SUPPLEMENTAL DISCLOSURE OF CASH-FLOW INFORMATION CASH PAID DURING THE YEAR FOR: Interest $ 27,347 $ 53,922 =========== =========== Income taxes (net of refund) $ 96,092 $ 4,523 =========== =========== SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES Unrealized (loss) gain on available-for-sale securities $ -- $ 222,319 =========== =========== Non-cash exercise of warrants and options by reduction of note payable $ -- $ 10,878 =========== =========== Subscribed stock receivable $ -- $ 3,000 =========== =========== See report of independent registered public accounting firm and accompanying notes to consolidated financial statements.
FS-11 BIOMERICA, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED MAY 31, 2009 AND 2008 1. ORGANIZATION ORGANIZATION Biomerica, Inc. and Subsidiary (collectively "the Company") are primarily engaged in the development, manufacture and marketing medical diagnostic kits. As of May 31, 2009 and 2008 the Company had one operational unit. The Company develops, manufactures, and markets medical diagnostic products designed for the early detection and monitoring of chronic diseases and medical conditions. Our medical diagnostic products are sold worldwide in two markets: 1) clinical laboratories and 2) point of care (physicians' offices and over-the-counter drugstores). Our diagnostic test kits are used to analyze blood or urine from patients in the diagnosis of various diseases and other medical complications, or to measure the level of specific hormones, antibodies, antigens or other substances, which may exist in the human body in extremely small concentrations. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The consolidated financial statements for the years ended May 31, 2009 and 2008 include the accounts of Biomerica, Inc. ("Biomerica") and ReadyScript, Inc. (as discontinued operations) as well as the Company's newly formed German subsidiary which has not begun full operations. All significant intercompany accounts and transactions have been eliminated in consolidation. During fiscal 2009 and 2008 there were no transactions in the discontinued operation and management intends to formally dissolve the corporation during fiscal 2010. ACCOUNTING ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reported period. Actual results could materially differ from those estimates. FAIR VALUE OF FINANCIAL INSTRUMENTS The Company has financial instruments whereby the fair market value of the financial instruments could be different than that recorded on a historical basis. The Company's financial instruments consist of its cash and cash equivalents, short-term investments, accounts receivable, available-for-sale securities, capital lease, shareholder debt, commercial bank line of credit (of which the balance was zero at May 31, 2009 and 2008), commercial bank equipment loan and accounts payable. The carrying amounts of the Company's financial instruments approximate their fair values at May 31, 2009. SFAS No. 157, Fair Value Measurement, defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. SFAS No. 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. SFAS No. 157 states that a fair value measurement should be determined based on the assumptions the market participants would use in pricing the asset or liability. In addition, SFAS No. 157 specifies a hierarchy of valuation techniques based on whether the types of valuation information ("inputs") are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the reporting entity's own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. FS-12 BIOMERICA, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED MAY 31, 2009 AND 2008 The three broad levels defined by SFAS No. 157 hierarchy are as follows: Level 1 - quoted prices for identical assets or liabilities in active markets. Level 2 - pricing inputs are other than quoted prices in active markets, which are either directly or indirectly observable as of the reported date. Level 3 - valuations derived from methods in which one or more significant inputs or significant value drivers are unobservable in the markets. These financial instruments are measured using management's best estimate of fair value, where the inputs into the determination of fair value require significant management judgment to estimation. Valuations based on unobservable inputs are highly subjective and require significant judgments. Changes in such judgments could have a material impact on fair value estimates. In addition, since estimates are as of a specific point in time, they are susceptible to material near-term changes. Changes in economic conditions may also dramatically affect the estimated fair values. The carrying values reflected in the consolidated balance sheet at May 31, 2009 reasonably approximate the fair values for financial instruments in accordance with SFAS No. 157. In making such assessment, Company has utilized quoted prices in active markets for identical assets (Level 1). No allowance for potential credit losses was considered necessary at May 31, 2009.
Fair Value Measurements at Reporting Date Using Quoted Prices in Active Significant Markets for Other Significant Identical Assets Observable Inputs Unobservable Inputs Description May 31, 2009 (Level 1) (Level 2) (Level 3) - -------------------------------- ------------ ----------------------- ----------------- -------------------- Short term investment Certificates of Deposit $100,000 $100,000 $ -- $ -- -------- -------- ------ ------ Total $100,000 $100,000 $ -- $ -- ======== ======== ====== ======
CONCENTRATION OF CREDIT RISK The Company, on occasion, maintains cash balances at certain financial institutions in excess of amounts insured by federal agencies. The Company provides credit in the normal course of business to customers throughout the United States and foreign markets. The Company's sales are not materially dependent on a single customer or a small group of customers. Biomerica had two customers which accounted for 26% of its sales for the fiscal year ended May 31, 2009 and two customers which accounted for 29% of its sales for the fiscal year ended May 31, 2008. The Company performs ongoing credit evaluations of its customers and requires prepayment in some circumstances. The Company does not obtain collateral with which to secure its accounts receivable. The Company maintains reserves for potential credit losses based upon the Company's historical experience related to credit losses. The Company monitors its accounts receivables balances closely. At May 31, 2009 and 2008, three customers each accounted for greater than 10% of gross accounts receivable. For the year ended May 31, 2009 no company accounted for more than 10% of the purchases of raw materials for Biomerica. For the fiscal year ended May 31, 2008 three companies accounted for more than 30% of the purchases for Biomerica on an unconsolidated basis. GEOGRAPHIC CONCENTRATION As of May 31, 2009 and 2008, respectively, approximately $807,000 and $523,000 of Biomerica's gross inventory and $15,000 and $22,000 of Biomerica's property and equipment, net of accumulated depreciation and amortization, was located in Mexicali, Mexico. FS-13 BIOMERICA, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED MAY 31, 2009 AND 2008 CASH EQUIVALENTS Cash and cash equivalents consist of demand deposits and money market accounts with original maturities of less than three months. SHORT TERM INVESTMENT Short term investment held by the Company consisted of a certificate of deposit. AVAILABLE-FOR-SALE SECURITIES The Company accounts for investments in accordance with Statement of Financial Accounting Standards No. 115 (SFAS 115), "ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES." This statement addresses the accounting and reporting for investments in equity securities which have readily determinable fair values and all investments in debt securities. The Company's marketable equity securities are classified as available-for-sale under SFAS 115 and reported at fair value, with changes in the unrealized holding gain or loss included in shareholders' equity. Available-for-sale securities consist of common stock of publicly-traded companies and are stated at market value in accordance with SFAS 115. Cost for purposes of computing realized gains and losses is computed on a specific identification basis. The proceeds from the sale of available-for-sale securities during fiscal 2009 was zero and during fiscal 2008 it was $1,780,478. Accumulated other comprehensive income (loss) relating to available-for-sale securities for the years ended May 31, 2009 and 2008 was $(7,398) and $0, respectively. The Company wrote off the entire amount of available-for-sale securities at May 31, 2009. ACCOUNTS RECEIVABLE The Company extends credit to its trade accounts receivable on a regular basis. International accounts are required to prepay until they establish a history with the Company and at that time they are extended credit at levels based on a number of criteria. Credit levels are approved by designated upper level management. Domestic customers are extended initial $500 credit limits until they establish a history with the Company or submit credit information. All increases in credit limits are also approved by designated upper level management. Management evaluates receivables on a quarterly basis and adjusts the reserve for bad debt accordingly. Balances over ninety days old are reserved for. Management evaluates quarterly what items to charge off. Any charge-offs are approved by upper level management prior to charging off. INVENTORIES Inventories are stated at the lower of cost (first-in, first-out method) or market and consist primarily of biological chemicals. Cost includes raw materials, labor, manufacturing overhead and purchased products. Market is determined by comparison with recent purchases or net realizable value. Such net realizable value is based on forecasts for sales of the Company's products in the ensuing years. The industry in which the Company operates is characterized by technological advancement and change. Should demand for the Company's products prove to be significantly less than anticipated, the ultimate realizable value of the Company's inventories could be substantially less than the amount shown on the accompanying consolidated balance sheet. Inventories approximate the following at May 31: 2009 2008 ----------- ----------- Raw materials $ 809,000 $ 718,000 Work in progress 818,000 570,000 Finished ProductS 537,000 506,000 ----------- ----------- Inventory Reserve (165,000) (30,000) ----------- ----------- Total $ 1,999,000 $ 1,764,000 =========== =========== Allowances for inventory obsolescence are recorded as necessary to reduce obsolete inventory to estimated net realizable value or to specifically reserve for obsolete inventory that the Company intends to dispose of. FS-14 BIOMERICA, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED MAY 31, 2009 AND 2008 PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Expenditures for additions and major improvements are capitalized. Repairs and maintenance costs are charged to operations as incurred. When property and equipment are retired or otherwise disposed of, the related cost and accumulated depreciation or amortization are removed from the accounts, and gains or losses from retirements and dispositions are credited or charged to income. Depreciation and amortization are provided over the estimated useful lives of the related assets, ranging from 5 to 10 years, using the straight-line method. Leasehold improvements are amortized over the lesser of the estimated useful life of the asset or the term of the lease. Depreciation and amortization expense amounted to $88,651 and $65,827 for the years ended May 31, 2009 and 2008, respectively. Management of the Company assesses the recoverability of property and equipment by determining whether the depreciation and amortization of such assets over their remaining lives can be recovered through projected undiscounted cash flows. The amount of impairment, if any, is measured based on fair value (projected discounted cash flows) and is charged to operations in the period in which such impairment is determined by management. Management has determined that there is no impairment of property and equipment at May 31, 2009. INTANGIBLE ASSETS On June 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 142 ("SFAS No. 142"), "Goodwill and Other Intangible Assets." SFAS No. 142 requires that the Company's license agreements be tested annually (or more frequently if impairment indicators arise) for impairment. The Company has established the date of May 31 on which to conduct its annual impairment test. Intangible assets are being amortized using the straight-line method over the useful life, not to exceed 18 years for marketing and distribution rights and purchased technology use rights, and 17 years for patents. Amortization amounted to $0 and $2,588 for each of the years ended May 31, 2009 and 2008, respectively. Intangible assets with indefinite lives such as perpetual licenses are not amortized but rather tested for impairment at least annually (see Note 3). The Company assesses the recoverability of these intangible assets by determining whether the amortization of the asset's balance over its remaining life can be recovered through projected undiscounted future cash flows. The amount of impairment, if any, is measured based on fair value and charged to operations in the period in which the impairment is determined by management. STOCK-BASED COMPENSATION All share-based payments to employees, including the grants of employee stock options, are recognized in the consolidated financial statements based on their fair values, but only to the extent that vesting is considered probable. Compensation cost for awards that vest will not be reversed if the awards expire without being exercised. The fair value of stock options is determined using the Black-Scholes option-pricing model. Compensation costs for awards are amortized using the straight-line method. Option pricing model input assumptions such as expected term, expected volatility and risk-free interest rate impact the fair value estimate. Further, the forfeiture rate impacts the amount of aggregate compensation. These assumptions are subjective and generally require significant analysis and judgment to develop. When estimating fair value, some of the assumptions are based on or determined from external data and other assumptions may be derived from the Company's historical experience with share-based arrangements. The appropriate weight to place on historical experience is a matter of judgment, based on relevant facts and circumstances. The Company relies on its historical experience and post-vested termination activity to provide data for estimating expected term for use in determining the fair value of its stock options. The Company currently estimates its stock volatility by considering historical stock volatility experience and other key factors. The risk-free interest rate is the implied yield currently available on U.S. Treasury zero-coupon issues with a remaining term equal to the expected term used as the input to the Black-Scholes model. The Company estimates forfeitures using its historical experience, which will be adjusted over the requisite service period based on the extent to which actual forfeitures differ, or are expected to differ, from such estimates. Because of the significant amount of judgment used in these calculations, it is reasonably likely that circumstances may cause the estimate to change. If, for example, actual forfeitures are lower than the Company's estimate, additional charges to net income may be required. FS-15 BIOMERICA, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED MAY 31, 2009 AND 2008 The following assumptions were used within the Black Scholes option-pricing model for the years ended May 31, 2009 and 2008; risk free interest rates ranging from 1.16% to 4.89%; dividend yield of 0%; expected life of the options of 3.5 and 6 years; volatiliy factors of the expected market price of the Company's common stock ranging from 71.18% to 104.13%. When shares are issued for services or other non-cash consideration, fair value is measured using the current market value on the day of the board approval of such issuance. MINORITY INTEREST At May 31, 2009 and 2008, Biomerica owned 88.9% of ReadyScript, which was discontinued in 2001. During fiscal 2009 and 2008, there were no transactions relating to the discontinued operations and the remaining balance sheet of the discontinued operations is de minimus. REVENUE RECOGNITION Revenues from product sales are recognized at the time the product is shipped, customarily FOB shipping point, at which point title passes. An allowance is established when necessary for estimated returns as revenue is recognized. As of May 31, 2009 and 2008, the reserve for allowances is $0. SHIPPING AND HANDLING FEES AND COSTS The consolidated financial statements reflect, for all periods presented, the adoption of the classification or disclosure requirements pursuant to Emerging Issues Task Force ("EITF") 00-10, "Accounting for Shipping and Handling Fees and Costs." The Company has historically classified income from freight charges to customers as sales, which has been offset by shipping and handling costs. The income from freight for the fiscal years 2009 and 2008, respectively, was $120,728 and $122,668. The financial statements presented herein show the income from shipping and handling as a component of sales for both periods and the costs of shipping and handling as a component of cost of goods sold. RESEARCH AND DEVELOPMENT Research and development expenses are expensed as incurred. The Company expensed $278,308 and $259,085 of research and development expenses during the years ended May 31, 2009 and 2008, respectively. INCOME TAXES The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109, "ACCOUNTING FOR INCOME TAXES." Under the asset and liability method of Statement No. 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under Statement No. 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. ADVERTISING COSTS The Company reports the cost of all advertising as expense in the period in which those costs are incurred. Advertising costs were approximately $6,000 and $57,000 for the years ended May 31, 2009 and 2008, respectively. FOREIGN CURRENCY TRANSLATION The subsidiary located in Germany operates primarily using local functional currency. Accordingly, assets and liabilities of this subsidiary are translated using exchange rates in effect at the end of the period, and revenues and costs are translated using average exchange rates for the period. The resulting adjustments are presented as a separate component of accumulated other comprehensive income. FS-16 BIOMERICA, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED MAY 31, 2009 AND 2008 RECLASSIFICATION Certain prior year amounts within the consolidated statement of operations and comprehensive income and consolidated statement of cash flows have been reclassified to conform to current year presentation. NET INCOME PER SHARE Basic earnings per share is computed as net income divided by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur from common shares issuable through stock options, warrants and other convertible securities. The total amount of anti-dilutive warrants or options not included in the earnings per share calculation for the years ended May 31, 2009 and 2008 was 586,500 and 150,000, respectively. The following table illustrates the required disclosure of the reconciliation of the numerators and denominators of the basic and diluted earnings per share computations.
For the Years Ended May 31 2009 2008 ---------- ---------- Numerator for basic and diluted net income per common share $ 354,180 $1,710,044 ========== ========== Denominator for basic net income per common share 6,619,399 6,125,981 Effect of dilutive securities: Options and Warrants 388,202 852,058 ---------- ---------- Denominator for diluted net income per common share 7,007,601 6,978,039 ========== ========== Basic net income per common share $ 0.05 $ 0. 28 ========== ========== Diluted net income per common share $ 0.05 $ 0. 25 ========== ==========
FS-17 BIOMERICA, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED MAY 31, 2009AND 2008 SEGMENT REPORTING The FASB has issued SFAS No. 131 "DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION". SFAS 131 requires public companies to report information about segments of their business in their annual financial statements and requires them to report selected segment information in their quarterly reports issued to shareholders. It also requires entity-wide disclosures about the product, services an entity provides, the material countries in which it holds assets and reports revenues, and its major customers. The Company's business segments are disclosed in Note 7. REPORTING COMPREHENSIVE INCOME In June 1997, the FASB issued SFAS No. 130, "REPORTING COMPREHENSIVE INCOME." This statement establishes standards for reporting the components of comprehensive income (loss) and requires that all items that are required to be recognized under accounting standards as components of comprehensive income (loss) be included in a financial statement that is displayed with the same prominence as other financial statements. Comprehensive income (loss) includes net income (loss) as well as certain items that are reported directly within a separate component of shareholders' equity. RECENT ACCOUNTING PRONOUNCEMENTS In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements--an amendment of ARB No. 51. This statement applies to all entities that prepare consolidated financial statements, except for non-profit organizations, but will affect only those entities that have an outstanding noncontrolling interest in one or more subsidiaries or that deconsolidate a subsidiary. SFAS No. 160 is effective for annual periods beginning December 15, 2008. The Company does not believe that the adoption of SFAS No. 160 will have a material impact on its financial statements. In December 2007, the FASB issued SFAS No. 141R, Business Combinations. SFAS 141R establishes a defined measurement period that governs the time period within which the business combination must be reported. In addition, the revised standard significantly expands the scope of disclosure requirements. SFAS No. 141R is effective for annual periods beginning after December 15, 2008. The Company does not believe that the adoption of SFAS No. 141R will have a material impact on its financial statements. In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities-an Amendment of FASB Statement No. 133. This Statement requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of and gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative agreements. SFAS No. 161 is effective for financial statements issue years and interim periods beginning after November 15, 2008. The Company does not believe that the adoption of SFAS No. 161 will have a material impact on its financial statements. In May, 2009 the FASB issued SFAS No. 165, "Subsequent Events". This statement established general standards of accounting for disclosure of events that occur after the balance sheet date but before financial statement are issued or are available to be issued. It requires the disclosure date through which an entity has evaluated subsequent events and the basis for that date. This would alert all users of financial statements that an entity has not evaluated subsequent events after that in the set of financial statements being presented. This statement is effective for interim and annual periods ending after June 15, 2009. The Company does not believe that the adoption of SFAS No. 165 will have a material impact on its financial statements. The FASB issued SFAS No. 168, "The FASB Accounting Standards Codification (Codification) and the Hierarchy of Generally Accepted Accounting Principles- a replacement of Financial Statement No. 162". On the effective date of the statement, The FASB Accounting Standards Codification will become the source of authoritative U.S. generally accepted accounting principles (GAAP) recognized by the FASB to be applied by nongovernmental entities. This statement is effective for financial statements issued for interim and periods ending after September 15, 2009. The Company does not believe that the adoption of SFAS No. 168 will have a material impact on its financial statements. FS-18 BIOMERICA, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED MAY 31, 2009AND 2008 3. INTANGIBLE ASSETS Intangible assets, net of accumulated amortization, consist of the following at May 31: 2009 2008 --------- --------- Patents and other intangible $ 36,465 $ 36,465 Less Accumulated Amortization (36,465) (36,465) --------- --------- $ -- $ -- ========= ========= The amounts included in the table above for the year ended May 31, 2009 exclude approximately $30,000 related to licenses which have an indefinite life and are not being amortized. 4. RELATED PARTY TRANSACTIONS NOTES PAYABLE - SHAREHOLDER In March 2004 the Company signed a note payable for the principal and interest due at that time of $313,318 and agreed to a forbearance of any payments for the length of the agreement. The note payable was secured by all the Company's assets except for the Lancer common stock owned by Biomerica. The note was due September 1, 2004. On March 9, 2007 the Company entered into an additional agreement entitled "Second Amendment of the Note, Loan and Modification Agreement" which was filed as an exhibit to a Form 10-QSB on April 16, 2007. The agreement called for payment of overdue principal by August 31, 2007, agreement by Janet Moore to enter into a Commercial Subordination Agreement, pledge of additional collateral to Janet Moore (all of which is subordinate to the Commercial Bank of California) and the reduction of the shareholder note through payments of $3,500 or (depending on certain quarterly results of the Company) $2,000 per month. As of May 31, 2009 and 2008 there were $0 and $95,936 payable on the shareholder note. During 2009 and 2008, the Company incurred $1,227 and $10,973, respectively, in interest expense related to the shareholder note. During 2004, a shareholder/director advanced the Company $4,000. At May 31, 2009 and 2008 $1,659, was owed in interest payable on this loan and a previous loan of $10,000. This amount was paid in July 2009. RENT EXPENSE Biomerica, Inc. currently leases facilities from four individuals, some of whom are shareholders of the Company. Gross rent expense of approximately $168,000 was incurred during each of the years ended May 31, 2009 and 2008, for this lease. There was no rent payable at May 31, 2009 or 2008. ACCRUED COMPENSATION During fiscal 2002-2005, two officers, who are also shareholders of the Company, agreed to defer payment of a portion of their salaries. At May 31, 2009 and 2008, $166,768 and $240,118, respectively, of deferred officer's salary is included in accrued compensation in the accompanying consolidated financial statements. No interest was accrued on the deferred wages until March 2007. As of March 1, 2007 the Company began accruing interest at the rate of 8% per year. In October, 2008 the interest rate was decreased to 4% per year. For the years ended May 31, 2009 and 2008, $20,187 and $20,299 in interest expense was incurred, respectively. Included in accrued compensation as of May 31, 2009 and 2008 is vacation accrual of $189,916 and $171,998, respectively. Included in the 2009 and 2008 vacation accrual is approximately $121,000 due to the former chief executive officer's estate. The Company is disputing the validity of this claim. FS-19 BIOMERICA, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED MAY 31, 2009 AND 2008 5. SHAREHOLDERS' EQUITY 1995 AND 1999 STOCK OPTION AND RESTRICTED STOCK PLANS In January 1996, the Company adopted a stock option and restricted stock plan (the "1995 Plan") which provided that non-qualified options and incentive stock options and restricted stock covering an aggregate of 500,000 of the Company's unissued common stock may be granted to affiliates, employees or consultants of the Company. Options granted under the 1995 Plan may be granted at prices not less than 85% of the then fair market value of the common stock and expire not more than 10 years after the date of grant. The 1995 plan expired in 2006. No option grants have occurred since 2006, however there are still some outstanding options. In August 1999, the Company adopted a stock option and restricted stock plan (the "1999 Plan") which provides that non-qualified options and incentive stock options and restricted stock covering an aggregate of 1,000,000 of the Company's unissued common stock may be granted to affiliates, employees or consultants of the Company. As of January 1, of each calendar year, commencing January 1, 2000, this amount is subject to automatic annual increases equal to the lesser of 1.5% of the total number of outstanding common shares, assuming conversion of convertible securities, or 500,000. Options granted under the 1999 Plan may be granted at prices not less than 85% of the then fair market value of the common stock and expire not more than 10 years after the date of grant. The Company has 201,999 warrants outstanding at May 31, 2009, which are included in the table below. The warrants were issued in transactions related to financing, primarily as a component of private placements. The warrants are for restricted stock and have expiration dates ranging from five to ten years from date of issue. Purchase prices for warrants range from $0.65 to $3.00. Activity as to stock options and warrants granted are as follows:
NUMBER WEIGHTED OF STOCK AVERAGE OPTIONS AND PRICE RANGE EXERCISE WARRANTS PER SHARE PRICE ----------------------------------------- Options and warrants outstanding at May 31, 2007 2,053,249 $0.20 - $3.00 $ 0.48 Options granted 41,000 $0.78 - $1.30 $ 0.98 Options and warrants exercised (557,625) $0.20 - $0.73 $ 0.29 Options and Warrants Canceled or Expired (34,500) $0.33 - $0.80 $ 0.69 --------- ------------- -------- Options and warrants outstanding at May 31, 2008 1,502,124 $0.25 - $3.00 $ 0.76 Options granted 378,500 $0.45 - $0.75 $ 0.57 Options and warrants exercised (129,200) $0.25 - $0.40 $ 0.26 Options and Warrants Canceled or Expired (76,750) $0.25 - $1.30 $ 0.62 --------- ------------- -------- Options and Warrants Outstanding At May 31, 2009 1,674,674 $0.30 - $3.00 $ 0.77 --------- ------------- --------
The weighted average fair value of options and warrants granted during 2009 and 2008 was $0.57 and $0.98, respectively. The aggregate intrinsic value of options exercised during fiscal 2009 and 2008 was approximately $3,900 and $295,000, respectively. The aggregate intrinsic value of options outstanding at May 31, 2009 was approximately $273,000. The aggregate intrinsic value of options vested and exercisable at May 31, 2009 was approximately $214,000. At May 31, 2009 total compensation cost related to nonvested stock option awards not yet recognized totaled $104,435. The weighted-average period over which this amount is expected to be recognized is 2.5 years. The weighted average remaining contractual term of options and warrants that were exercisable at May 31, 2009 was 2.13 years. FS-20 BIOMERICA, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED MAY 31, 2009AND 2008 The following summarizes information about all of the Company's stock options and warrants outstanding at May 31, 2009. These options and warrants are comprised of those granted under the 1995 and 1999 plan and those granted outside of these plans.
WEIGHTED AVERAGE WEIGHTED NUMBER WEIGHTED RANGE OF NUMBER REMAINING AVERAGE EXERCISABLE AVERAGE EXERCISE OUTSTANDING CONTRACTUAL EXERCISE AT EXERCISE PRICES MAY 31, 2009 LIFE IN YEARS PRICE MAY 31, 2009 PRICE - ----------------------------------------------------------------------------------------------------------- $0.30 - $0.60 1,036,175 2.54 $0.45 812,300 $0.43 $0.65 - $0.80 484,499 4.19 $0.75 326,374 $0.75 $1.30 - $3.00 154,000 0.12 $2.96 152,000 $2.98
STOCK ACTIVITY In July 2007 the Board of Directors granted a stock option for 25,000 options to a new Company director. The options vested one half immediately and then will vest one quarter per year thereafter. The option is exercisable at a price of $0.78 per share and expires in five years. Management assigned a value of $10,541 to this option. In November 2007 the Board of Directors granted stock options for 16,000 options to employees of the Company. The options vested one quarter immediately and then will vest one quarter per year thereafter. The options are at the exercise price of $1.30 and expire in five years. Management assigned a value of $10,952 to these options. In October 2008 the Board of Directors granted stock options for 100,000 options to outside directors of the Company. The options vested one quarter immediately and then will vest one quarter per year thereafter. The options are at the exercise price of $0.75 and expire in ten years. Management assigned a value of $58,834 to these options. In January 2009 the Board of Directors granted stock options for 168,500 options to employees of the Company. The options vested one quarter immediately and then will vest one quarter per year thereafter. The options are at the exercise price of $0.45 and expire in five years. Management assigned a value of $38,270 to these options. In March 2009 the Board of Directors granted stock options for 110,000 options to employees of the Company. The options vested one quarter immediately and then will vest one quarter per year thereafter. The options are at the exercise price of $0.60 and expire in five years. Management assigned a value of $35,938 to these options. During the fiscal year ended May 31, 2008, options and warrants to purchase 557,625 shares were exercised at prices ranging from $0.20 to $0.73. Total proceeds to the Company were $162,386. During the fiscal year ended May 31, 2009, options and warrants to purchase 141,200 shares were exercised at prices ranging from $0.20 to $0.40. Total proceeds to the Company were $36,386. FS-21 BIOMERICA, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED MAY 31, 2009 AND 2008 6. INCOME TAXES Income tax (benefit) expense from continuing operations for the years ended May 31, 2009 and 2008 consists of the following current (benefit) provisions: May 31, 2009 2008 --------- --------- Current: U.S. Federal $ -- $(149,000) State and Local 37,000 82,000 --------- --------- 37,000 (67,000) Deferred: U.S. Federal (68,000) -- State and Local (56,000) -- --------- --------- (124,000) -- --------- --------- $ (87,000) $ (67,000) ========= ========= Income tax benefit expense from continuing operations differs from the amounts computed by applying the U.S. Federal income tax rate of 35 percent to pretax loss as a result of the following:
May 31, 2009 2008 --------- --------- Computed "expected" tax expense (benefit) $ 93,000 $ 575,000 Increase (reduction) in income taxes resulting from: True up of carryforwards and other items (43,000) 148,000 Change in valuation allowance (93,000) (731,000) State income taxes, net of federal benefit 15,000 94,000 Tax benefit from the release of deferred tax allowance (58,000) (170,000) Other (1,000) 17,000 --------- --------- $ (87,000) $ (67,000) ========= ========= The tax effect of significant temporary differences are presented below. May 31, 2009 2008 --------- --------- Deferred tax assets: Accounts receivable, principally due to allowance for doubtful accounts and sales returns $ 35,000 $ 34,000 Inventory valuation 67,000 -- Compensated absences and deferred payroll 166,000 196,000 Net operating loss carryforwards 314,000 391,000 Tax credit carryforwards 18,000 6,000 Accumulated depreciation of property and equipment (9,000) 16,000 Other 62,000 93,000 Less Valuation Allowance (415,000) (566,000) --------- --------- Net deferred tax asset $ 238,000 $ 170,000 ========= =========
FS-22 BIOMERICA, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED MAY 31, 2009 AND 2008 The Company has provided a valuation allowance for $415,000 and $566,000 as of May 31, 2009 and 2008, respectively. Although the Company has achieved net income over the last four fiscal years, predicting future taxable income is difficult and influenced by many factors. After analyzing our tax position, Management has provided such allowance to provide for future income. At May 31, 2009 and 2008, the Company has federal income tax net operating loss carryforwards of approximately $1,100,000 and $1,119,000, respectively. Of the reported net operating loss carryforwards, approximately $211,000 are related to windfall tax benefits from the exercise of the Company's stock options by certain employees. Pursuant to SFAS No. 165, Share-Based Payments, the federal benefit of approximately $74,000 associated with this portion of the net operating loss will be credited to additional paid in capital when the tax benefits are actually realized. The federal net operating loss carryforwards begin to expire in 2021. The federal credits begin to expire in 2015. At May 31, 2009 and 2008, the Company has federal research and development tax credit carryforward of approximately $18,000 and $6,000, respectively. The federal credits begin to expire in 2009. Pursuant to Internal Revenue Code Sections 382 and 383, annual use of the Company's net operating loss ("NOL") and credit carryforwards may be limited by statute because of a cumulative change in ownership of more than 50%. Pursuant to Sections 382 and 383 of the Code, the annual use of the Company's NOLs would be limited if there is a cumulative change of ownership (as that term is defined in Section 382(g) of the Code) of greater than 50% in a three year period. Based on management's analysis the Company does not believe that a cumulative change in ownership of greater than 50% has taken place. In June 2006, the FASB issued Interpretation No. 48, or FIN 48, Accounting for Uncertainty in Income Taxes - an Interpretation of FAS 109. FIN 48 provides clarification for the financial statement measurement and recognition of tax positions that are taken or expected to be taken on a tax return. For the fiscal year ended May 31, 2009 and 2008 the Company did an analysis of its FIN 48 position and has not identified any uncertain tax positions as defined under FIN 48. Should such position be identified in the future and should the Company owe interest and penalties as a result of this, these would be recognized as income taxes in the financial statements. 7. BUSINESS SEGMENTS Reportable business segments are identified by product line and for the years ended May 31, 2009 and 2008 and approximate the following: 2009 2008 -------- -------- Domestic long-lived assets, net: Medical diagnostic products $352,000 $348,000 ======== ======== Foreign long-lived assets, net: Medical diagnostic products $ 15,000 $ 22,000 ======== ======== The Company operates in one business segment, Medical Diagnostic Products. Identifiable assets by business segment are those assets that are used in the Company's operations in each industry. Identifiable assets are held primarily in the United States. FS-23 BIOMERICA, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED MAY 31, 2009 AND 2008 The net sales as reflected above consist of sales to unaffiliated customers only as there were no significant intersegment sales during fiscal years 2009 and 2008. Biomerica had two customers which accounted for 26% of its sales for the fiscal year ended May 31, 2009 and two customers which accounted for 29% of its sales for the fiscal year ended May 31, 2008. Geographic information regarding net sales is approximately as follows: 2009 2008 ---------- ---------- Net sales: Europe $2,631,000 $2,549,000 United States 1,198,000 1,359,000 Asia 956,000 854,000 South America 92,000 70,000 Middle East 40,000 57,000 Other foreign 18,000 38,000 ---------- ---------- Total net sales $4,935,000 $4,927,000 ========== ========== 8. COMMITMENTS AND CONTINGENCIES OPERATING LEASES The Company is currently leasing its facilities on a month-to-month basis. The facilities are owned and operated by four individuals, some of whom are shareholders and one of whom is an officer and director. Effective May 1, 2007, the monthly rent was set at $14,000 and has not increased. Management believes there would be no significant difference in the terms of the property rental if the Company leased from a third party. Total rent expense for this facility was approximately $168,000 during each of the years ended May 31, 2009 and 2008. Biomerica has various insignificant leases for office equipment. RETIREMENT SAVINGS PLAN Effective September 1, 1986, the Company established a 401(k) plan for the benefit of its employees. The plan permits eligible employees to contribute to the plan up to the maximum percentage of total annual compensation allowable under the limits of Internal Revenue Code Sections 415, 401(k) and 404. The Company, at the discretion of its Board of Directors, may make contributions to the plan in amounts determined by the Board each year. No contributions by the Company have been made since the plan's inception. LITIGATION The Company is, from time to time, involved in legal proceedings, claims and litigation arising in the ordinary course of business. While the amounts claimed may be substantial, the ultimate liability cannot presently be determined because of considerable uncertainties that exist. Therefore, it is possible the outcome of such legal proceedings, claims and litigation could have a material effect on quarterly or annual operating results or cash flows when resolved in a future period. However, based on facts currently available, management believes such matters will not have a material adverse affect on the Company's consolidated financial position, results of operations or cash flows. There were no legal proceedings pending as of May 31, 2009, except for proceedings related to the collection of accounts receivable which have been previously reserved for. FS-24 BIOMERICA, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED MAY 31, 2009 AND 2008 CONTRACTS During the first quarter of fiscal 2006 the Company entered into an agreement with another company for the purpose of developing certain technology for Biomerica. The total amount of the contract was for $55,000, with a 40% down payment required and milestone payments for the balance of the contract. The balance due at May 31, 2007 was $16,500. On June 5, 2006, a milestone payment of $16,500 was made which was included in payables as of May 31, 2006. The remaining $16,500 has not been recorded as a liability at May 31, 2009 due to the fact that payment of it is contingent upon performance of certain functions by the contractor. The Company has not and does not expect to make the final payment in the future on this contract because complete performance of the contract has not been achieved and the contract has been discontinued. Biomerica has two royalty agreements in which it has obtained rights to manufacture and market certain products for the life of the products. Royalty expense of approximately $106,300 and $118,500 is included in cost of sales for these agreements for the years ended May 31, 2009 and 2008, respectively. Sales of products manufactured under these agreements comprise approximately 16.4% and 17.6% of total sales for the fiscal years ended May 31, 2009 and 2008, respectively. Biomerica may license other products or technology in the future as the Company deems necessary for conducting business. On March 27, 2009 the Company signed an Asset Purchase Agreement with a European company for the purchase of certain technology related to the manufacture of certain medical diagnostic tests. Consideration for this purchase was a nominal deposit upon signing the agreement and a nominal transfer fee upon successful commencement of production of the products. A royalty shall be paid for five years beginning on the date of first sale of finished product derived from the purchased assets. These purchased assets did not constitute a business under FAS 141(R). Royalty payments of 10% of sales are due on these products for a period of five years. 9. DEBT In February 2007 the Company entered into a Commercial Security Agreement, two Promissory Notes, a Subordination Agreement and a Business Loan Agreement. These agreements pertain to a $200,000 working capital line of credit and a $200,000 equipment loan with Commercial Bank of California and were collateralized by substantially all of the assets of the Company. In February 2009 the equipment loan was paid off through proceeds from the loan obtained from Union Bank (see below). The line of credit was discontinued in November 2008. On February 13, 2009, the Company entered into a Small Business Banking Agreement with Union Bank of California for a one year business line (the "Line") of credit in the amount of $400,000. The interest rate for the line of credit is the prime rate in effect on the first day of the billing period, as published in the Wall Street Journal Prime West Coast Edition, plus a spread of 1.00%. Minimum monthly payments will be the sum of (i) the amount of interest charge for the billing period, plus (ii) any amount past due, plus (iii) any fees, late charges and/or out-of-pocket expenses assessed. If the Line is not renewed as of the last day of the term of the Line, the entire unpaid balance of the Line, including unpaid fees and charges will be due and payable. The Company has granted the bank security interest in the assets of the Company as collateral. The Company must maintain for not less than thirty consecutive days in every calendar year, a period in which all amounts due under the revolving credit agreements with the bank are at a zero balance. The Company did not owe anything on this line of credit as of May 31, 2009. On February 13, 2009, the Company entered into a Small Business Bank Agreement with Union Bank for a business loan ("Loan") for $133,000 and an interest rate of 6.50%. Loan proceeds were disbursed in one single funding on March 5, 2009. The Loan was used for the purpose of paying off the business loan, which had been established with Commercial Bank. The fixed asset serves as collateral for the loan. The Loan is payable in thirty-six monthly payments of approximately $4,000. FS-25 BIOMERICA, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED MAY 31, 2009 AND 2008 Future maturity of the commercial line of credit is as follows: Year Ended May 31, 2010 $ 42,254 2011 45,084 2012 35,443 -------- Total obligation 122,781 Less Current Portion 42,254 -------- Long-term portion $ 80,527 ======== 10. DISCONTINUED OPERATIONS The following summarizes the net liabilities of the discontinued operations of ReadyScript, as of May 31, 2009 and 2008. There was no operational activity for the years ended May 31, 2009 and 2008. Balance Sheet Items: May 31, 2009 2008 ------ ------ Assets: Miscellaneous receivable $5,304 $5,304 Less liabilities: Accrued Expenses 4,709 4,709 ------ ------ Net liabilities $ 595 $ 595 ====== ====== 11. SUBSEQUENT EVENTS On June 18, 2009, the Company entered into an agreement to lease a building in Irvine, California, commencing September 1, 2009 and ending August 31, 2016. The initial base rent is set at $18,490 with a security deposit of $22,080. The sum of $40,568 was due upon execution of the lease. Management is currently working on plans for the relocation of the Company which should take place by the end of the calendar year. FS-26 -----END PRIVACY-ENHANCED MESSAGE-----